EUR/USD tests strength at 1.0800 as Eurozone inflation remains stickier than expected

The EUR/USD pair walks on thin ice near the crucial support of 1.0800 in Friday’s European session. The major currency pair declined even as data showed that inflation in the Eurozone turned out more stubborn than expected in February.

The Eurostat reported that the preliminary annual Harmonized Index of Consumer Prices (HICP) rose by 2.6%, while investors anticipated it to increase by 2.5%. In January, the measure was up by 2.8%. The monthly HICP grew by a strong 0.6% after contracting 0.4% in January.

The annual Core HICP, which excludes volatile items such as food and oil prices, grew at a higher pace of 3.1% against expectations of 2.9%, but it declined compared to January’s reading of 3.3%. Compared with the previous month, the Core HICP rose 0.7% after decreasing by 0.9% in January.

The data suggests that inflation in the Eurozone continued to decelerate in February. Still, it came in somewhat higher than what economists expected. This indicates that the progress in inflation declining towards the 2% target is slow, which could push back expectations of interest-rate cuts by the European Central Bank (ECB) in the June policy meeting.

Meanwhile, the US Dollar turns sideways above 104.00 after a strong recovery as the expected decline in the United States Core Personal Consumption Expenditure Price Index (PCE) data for January has capped market expectations for rate cuts by the Federal Reserve (Fed) in the June policy meeting.

In today’s session, investors will focus on the US ISM Manufacturing PMI data for February, which will be published at 15:00 GMT. Markets expect the index to stand at 49.5, higher than the prior reading of 49.1.

(The story was corrected on March 1 at 11:22 GMT to say, in the fourth paragraph, that the ECB inflation target is at 2%, not 22%.)