EUR/USD stays firm ahead of US inflation
- EUR/USD locks in key resistance of 1.0300 after recovering from over a two-year low of 1.0175, with the US CPI data for December in focus.
- The US Dollar faces pressures after softer-than-expected US PPI data for December.
- ECB’s Holzmann expects the path towards the neutral rate won’t be straightforward.
EUR/USD clings to gains near 1.0300 in Wednesday’s European session after a strong recovery on Tuesday. The major currency pair consolidates as investors await the United States (US) Consumer Price Index (CPI) data for December, which will be published at 13:30 GMT. Investors will pay close attention to US inflation as it will influence market speculation for the Federal Reserve’s (Fed) monetary policy outlook.
Month-on-month headline inflation is estimated to have grown steadily by 0.3%. In the same period, the core CPI – which excludes volatile food and energy items – is expected to have risen by 0.2%, slower than the former release of 0.3%. Economists expect the annual headline CPI to have accelerated to 2.9% from 2.7% in November, with core reading rising steadily by 3.3%.
Signs of stubborn price pressures could accelerate expectations that the Fed will avoid cutting interest rates this year. While some slowdown in inflationary pressures is unlikely to boost Fed dovish bets as investors expect incoming policies under Trump’s administration, such as immigration controls, tax cuts, and tariff hikes, would fuel growth rate.
Ahead of the US inflation data, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slips to near 109.00. The US Dollar (USD) corrected sharply on Tuesday after the release of the US Producer Price Index (PPI) data for December, which showed that producer inflation grew at a slower-than-expected pace.
According to the CME FedWatch tool, traders expect the Fed to cut interest rates just once this year, compared to two rate cuts projected by Fed officials in December’s Summary of Economic Projections (SEP). Traders pare dovish bets after the release of the surprisingly upbeat US Nonfarm Payrolls (NFP) data for December on Friday.
Daily digest market movers: EUR/USD gains ground as US Dollar corrects
- EUR/USD holds onto gains near 1.0300 at the expense of the US Dollar. The Euro (EUR) performs weakly against its major peers on Wednesday as investors are cautious ahead of President-elect Donald Trump's return to the White House. Higher import tariffs from Trump’s administration are expected to falter the Eurozone’s exports, making them costlier for US importers.
- Rising concerns over Eurozone economic growth and price pressures remaining broadly under control have boosted expectations of more interest rate cuts from the European Central Bank (ECB) this year. The ECB cut its Deposit Facility rate by 100 basis points (bps) in 2024 and is expected to cut a full percentage point again by mid-summer to reach 2%.
- ECB Chief Economist Philip Lane commented at a Goldman Sachs event on Tuesday that he is confident that inflation in the services sector will come down “quite a bit” in the coming months. This could lead to a sustainable return of price pressures towards the ECB’s target of 2%.
- While a lot of ECB policymakers are comfortable with market expectations for the ECB to reduce interest rates by 25 bps at each of the next four policy meetings, ECB policymaker and Austrian Central Bank Governor Robert Holzmann expects the path to lower rates is not as “straightforward as it seems”. Holzmann added that the core inflation is currently “closer to 3% than to 2%” and highlighted some energy-related challenges that could impact the ECB’s decisions.
Technical Analysis: EUR/USD climbs to near 1.0300
EUR/USD rebounds to near 1.0300 after gaining ground from the over-two-year low of 1.0175 reached on Monday. The major currency pair bounces back on divergence in momentum and price action. The 14-day Relative Strength Index (RSI) formed a higher low near 35.00, while the pair made lower lows.
However, the outlook of the shared currency pair is still bearish as all short-to-long-term Exponential Moving Averages (EMAs) are sloping downwards.
Looking down, Monday’s low of 1.0175 will be the key support zone for the pair. Conversely, the January 6 high of 1.0437 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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