MUFG’s Head of Research Derek Halpenny notes that EUR/USD has fully reversed its late-January rally, dropping about 2.5% back toward its opening 2026 level. Softer Eurozone inflation has increased modest ECB rate-cut pricing, while speculation about President Lagarde’s tenure and the hawkish tilt of potential successors adds uncertainty, though inflation dynamics remain the key policy driver.
EUR/USD pressured by inflation and ECB talk
“EUR/USD declined further yesterday and we have now seen a substantial reversal from the intra-day high of 1.2081 set on 27th January.”
“The euro correction lower has been reinforced by softer inflation data that has seen pricing for a rate cut from the ECB increase.”
“We continue to see downside risks to inflation given our expectations of a stronger euro, declines in crude oil prices and wage growth more consistent with lower inflation.”
“Our current view is that the ECB keeps its policy stance unchanged but the risk to that view is clearly that we see a another cut this year.”
“Still, while all of the speculation on who takes over could be market-moving, a divergence of inflation relative to the target will still be more important in shaping the direction of monetary policy rather than who becomes President.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/eur-usd-january-rally-unwinds-on-ecb-risks-mufg-202602201124
