The euro suddenly skyrocketed almost 0.5 percent to the range of 1.1320s against the U.S. dollar. That was occurred in the second half of Europe today (February 2). 

The release of Eurozone inflation data showed a rapid price growth. This situation was reinforcing expectations of a rate hike and eating away at the pessimism of the majority of analysts.

The Eurostat's preliminer report showed that the Eurozone inflation rate reached 5.1% (Year-on-Year) in January 2022. Before, it was rising by 5.0% in December 2021. 

In fact, the previous consensus expected the inflation rate to weaken to 4.4%. The data eroded the confidence of some market players who think the European Central Bank (ECB) will be the most dovish monetary authority. 

The ECB interest Rate may Increase this Year 

Although ECB officials think the rise in inflation will only be temporary, the data seem to signal a stronger price pressures than they expected due to the expensive energy commodity prices.

That was also related to the prolonged supply disruptions. Consequently, the prospect of an ECB rate hike this year is again open because of that condition. 

Ulrich Leuchtmann, head of forex at Commerzbank, said that money markets were now taking into account the chances of an ECB rate hike in the final quarter of the year.

Some market players will expect the ECB to be more hawkish in the announcement of the results of tomorrow's policy meeting. However, he said the impact on the euro in the short term.

That situation would depend on the ECB President Christine Lagarde's remarks in her post-meeting press conference. The recent Eurozone inflation release is quite shocking the forex market. 

The Index of Dollar Slipped by more than 0.4%

The U.S. dollar index (DXY) was hit back more than 0.4 percent to the 95.80s. That was due to the weighting of the index which was largely sourced from the EUR/USD exchange rate. 

The direction of the next move is likely to be difficult to predict until Lagarde's press conference. The USD weakened from a 19-month high due to the America’s economic data.

That data did not meet the expectations, as well as the Fed's aggressiveness in planning a rate hike. When this news was written on Wednesday morning, the Dollar Index fell by 0.40% to 96.25. 

ISM's version of the U.S. Manufacturing PMI fell from 58.8 to 57.6 in January 2022. That number is slightly better than the estimated decline to 57.4. 

Again, OMICRON Brings it’s Effect

Although still in the expansion category, the manufacturing index this time topped a record low since The November 2020. The data can be seen in the market. 

According to Timothy Fiore, the Chairman of the ISM Manufacturing Business Survey Committee, the limited production of manufacturers in January was caused by the outbreak of COVID Omicron variant infections and supply chain problems.

Factories do work because of high demand, but, their material input is limited. The surge in Omicron infection also affects the absence of workers. 

Nevertheless, Fiore is optimistic that manufacturing will continue to improve in the future. The U.S. manufacturing sector is still experiencing limited high demand constraints by supply chains.

The Reactions after the Monetary Policy Release

However, January was the third month in a row with indications of increased labor resources and supplier delivery performance.  Although Make Sure Interest Rates Rise, the Fed Officials Are Wary.

Meanwhile, the Fed officials began making wary comments after the monetary policy announcement last January. A rate hike in March is almost certain.

However, they also warn of a possible impact. Therefore, they keep any options open amid the uncertainty of the current inflation outlook. 

They are on the way to a rate hike in March. After that, they want to see the data that will be released while seeing the development of the OMICRON.