Simon Harvey, Head of FX Analysis at Monex Europe, provides an update on the euro this morning referring to Klaas Knot’s speech:

“The single currencies rally faded with European equities in the afternoon of yesterday’s session, a dynamic that was arguably driven by hawkish central bank commentary from both sides of the Atlantic. Speaking on behalf of the ECB was the Bank of Latvia Governor Martins Kazaks and the Dutch Central Bank Governor Klaas Knot, both of which have a tendency to be hawkish. Both compounded commentary by Isabel Schnabel earlier in the week, who stated that monetary tightening to date has had little effect on prices, as they stressed the need for policy to tighten beyond the scheduled 50bp hike to 3% in March.

Klaas Knot went one step further, however, as he stated that a further 50bp hike in May remains a possibility if “underlying inflation pressures do not materially abate”. Today the euro has largely retraced yesterday’s losses, with the move potentially aided by the release of Germany’s flash CPI data for January. Printing at 8.7% YoY, inflation crept up slightly in Germany, but undershot expectations of 8.9%. For what it is worth, the consensus expectation is largely meaningless this time around as it was compiled before the eurozone HICP data where Eurostat estimated inflation at around 8.6-8.7%. On a cleaner note for markets, however, French preliminary Q4 wage data saw salaries increase at 0.6%, undershooting expectations by 0.4 percentage points. This will come as a minor relief for the ECB, which has re-centred its concerns on core inflation and its drivers.

“With little left in terms of eurozone data, focus for EUR traders will likely turn to the crosses with the Riksbank set to announce its latest policy decision at 08:30 GMT ahead of Governor Thedeen’s first press conference at 10:00 GMT, while NBP Governor Glapinski is set to speak at 14:00 GMT after the Polish central bank voted to hold rates yesterday for the fourth consecutive meeting.

Focusing on the Riksbank, after core inflation exceeded it’s projections in Q4, expectations for today’s decision has drifted towards a 50bp hike, a move that would bring the policy rate to 3% and the Riksbank’s previous projection for the terminal rate. With inflation pressures abating at a slow pace, the Riksbank will likely be forced to increase its projected terminal rate today, signalling further hikes are in the pipeline despite elevated concerns over the highly leveraged housing market. On top of interest rates, however, focus will be on the central bank’s characterisation of the krona as speculation has arisen that language around potential intervention may be included in their communications due to EURSEK trading around an all-time high.

Although we think it is premature for such language and will mark a stark U-turn by the new Governor, we don’t rule out the possibility.”