EUR/USD rises sharply as US Dollar tumbles after mix US inflation data
- EUR/USD gains sharply to near 1.0350 after mixed US CPI data for December.
- Investors expect the Fed to cut interest rates only once this year.
- ECB’s Holzmann expects the path towards the neutral rate won’t be straightforward.
EUR/USD extends Tuesday's recovery on Wednesday and jumps to near 1.0350. The major currency pair strengthens as the US Dollar (USD) tumbles after the United States (US) Consumer Price Index (CPI) data for December showed that price pressures remain mixed. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides sharply to near 108.70.
The CPI report showed that the core inflation – which excludes volatile food and energy items – rose by 3.2%, slower than estimates and the November reading of 3.3%. In the same period, the headline inflation accelerated to 2.9%, as expected. Month-on-month headline CPI grew by 0.4%, faster than expectations and the prior releaase of 0.3%. The core inflation rose in line with estimates of 0.2%, slower than the 0.3% in November.
Mixed inflationary pressures are unlikely to impact current market expectations that the Federal Reserve (Fed) will deliver fewer interest rate cuts this year as investors expect incoming policies under Trump’s administration, such as immigration controls, tax cuts, and tariff hikes, would fuel growth rate.
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 pared 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 at US Dollar's expense
- EUR/USD climbs near 1.0350 at the expense of the US Dollar (USD). 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%.
- In Wednesday's European session, ECB policymaker and Governor of the Bank of France François Villeroy de Galhau said, "It makes sense for interest rates to reach 2% by the summer" as we have practically won the "battle against inflation". Villeroy warned about deepening "downside risks to French growth outlook" but doesn't see a "recession" happening anytime soon.
- 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.
Euro PRICE Today
The table below shows the percentage change of Euro (EUR) against listed major currencies today. Euro was the strongest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.43% | -0.79% | -1.03% | -0.37% | -0.90% | -0.87% | -0.38% | |
| EUR | 0.43% | -0.37% | -0.61% | 0.04% | -0.47% | -0.45% | 0.05% | |
| GBP | 0.79% | 0.37% | -0.25% | 0.43% | -0.10% | -0.09% | 0.43% | |
| JPY | 1.03% | 0.61% | 0.25% | 0.67% | 0.13% | 0.15% | 0.66% | |
| CAD | 0.37% | -0.04% | -0.43% | -0.67% | -0.53% | -0.51% | -0.00% | |
| AUD | 0.90% | 0.47% | 0.10% | -0.13% | 0.53% | 0.02% | 0.52% | |
| NZD | 0.87% | 0.45% | 0.09% | -0.15% | 0.51% | -0.02% | 0.51% | |
| CHF | 0.38% | -0.05% | -0.43% | -0.66% | 0.00% | -0.52% | -0.51% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
Technical Analysis: EUR/USD bounces back to near 1.0350
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.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
