Euro rally tempered by Lagarde growth warning

The euro rallied on Monday, but found its gains capped by a speech by European Central Bank (ECB) President Christine Lagarde.

Meanwhile, the pound is trending broadly higher this morning, with GBP/EUR climbing to €1.1605 and GBP/USD jumping to $1.2048. GBP/CAD is buoyed at CA$1.6162, while GBP/AUD and GBP/NZD retreat to AU$1.7892 and NZ$1.9311, respectively.

Looking ahead, will a slowing of German inflation weigh on the euro later this afternoon?

What’s been happening?

The euro got off to a solid start this week. The single currency benefitting from Ukraine optimism and a weaker US dollar.

However, the euro pared some of these gains later in the session as ECB President Christine Lagarde testified before the European Parliament. Telling lawmakers that Eurozone economic growth is slowing rapidly.

The US dollar, meanwhile, was undermined on Monday by a pullback in US Treasury yields. The slump in yields being linked to the continued repricing of Federal Reserve rate hike expectations.

Capping these losses was a risk-off mood as investors were unsettled by the Covid protests which emerged in China over the weekend.

At the same time, the pound was undermined by the release of the Confederation of British Industry’s (CBI) distributive trades index, after it reported a larger-than-expected fall in UK retail sales volumes.

What’s coming up?

The spotlight today will undoubtedly be on the publication of Germany’s consumer price index.

November’s preliminary figures are expected to report inflation the Eurozone’s largest economy slowed from 10.4% to 10.3%. A pullback in German inflation could weaken expectations for tomorrow’s Eurozone release and weigh on the euro.

However, there is a risk inflation could overshoot expectations as it has done repeatedly in recent months. An above forecast reading could bolster the euro as it will place more pressure on the ECB to deliver a 75bps rate hike next month.

A speech by the Bank of England’s (BoE) Catherine L Mann is likely to be the focus for GBP Investors today. Will a broadly hawkish outlook from the BoE policymaker help to prop up demand for the pound?

Meanwhile, in the absence of any notable US data, movement in the US dollar is likely to remain tied to market sentiment and US Treasury yields.