- EUR/USD is trading higher again, flirting with a fresh seven-day high.
- European inflation is heading higher again in several core countries, snapping the disinflationary path.
- Meanwhile, markets remain on edge over the rumors and pushbacks on President-elect Donald Trump’s tariff schemes.
The Euro (EUR) is outpacing the US Dollar (USD) on Tuesday and extends its recovery for the third day in a row, after inflation numbers for the Eurozone as a whole reveal that disinflation has ended for now. Earlier expectations got already revised after the preliminary German Harmonized Index of Consumer Prices (HICP) data for December, released on Monday, showed that the monthly headline HIPC inflation jumped by 0.7%, above the 0.5% estimate. On a yearly basis, headline HICP rose by 2.9%, compared to 2.4% in November.
Meanwhile, markets are on edge over the whipsaw reactions and knee-jerk moves over the tariff plans from President-elect Donald Trump. The Washington Post published a piece mentioning that Trump was considering simplifying his tariff schemes by imposing a single universal tariff on critical imports and goods. Hours later, Trump himself came out to refute the rumors and confirm that the schemes and plans would remain in place as earlier announced.
Daily digest market movers: End of disinflation for now in Eurozone
- The French preliminary HICP for December has already been released earlier on Tuesday. The monthly gauge snapped the previous disinflationary print by jumping 0.2%, below the 0.4% expectation and above the -0.1% from November. The yearly gauge came in at 1.8%, which is 0.1% higher than the 1.7% from November.
- The preliminary Eurozone HICP for December has been released.
- The monthly headline HICP jumped to 0.4%, snapping the disinflationary -0.3% from the month before.
- The yearly headline HICP came in at 2.4% as expected, against the 2.2% from November.
- The monthly core HICP rallied to 0.5%, beating the -0.6% from November.
- The yearly core HICP came a touch higher than expected at 2.8% against 2.7% consensus view and the previous reading.
- For now, the European Central Bank (ECB) is projected to cut its policy rate by 25 basis points on January 30.
- Italian inflation saw a similar pattern is seen as in Germany, with the preliminary December monthly HICP heading to 0.1% from -0.1%.
- German Bunds ticked up quite a bit last week and stretched up to 2.47% on Monday. This Tuesday, rates are starting to ease, with the Bund currently trading around 2.46%.
- European equities are having a change of heart after the European inflation data, and are heading into green numbers.
Technical Analysis: Enough to fuel more upside to 1.05?
EUR/USD is in a perfect technical bounce, though where to go next is becoming blurry. The geopolitical developments from Monday have helped the Euro find support at 1.0294 and rally all the way to nearly 1.0448. The question now will be whether the Euro has enough room left to head above 1.0450. This will not be the case if those European bonds start to fade from their Monday high points and need more upside to pull the Euro further up towards 1.05.
The first big level to break is 1.0448, the low of October 3, 2023. Once through that level, the 55-day Simple Moving Average (SMA) at 1.0558 comes into play. Another catalyst will be needed for this kind of move, as it could squeeze the Dollar bulls.
On the downside, ahead of the current two-year low at 1.0224, the 1.0294 level is now acting as the new first line of defence. It was a pivotal point on Monday, offering room for buyers in EUR/USD to get involved and push price action higher. Further down, the round level at 1.02 would mean a fresh two-year low. Breaking below that level would open up the room to head to parity, with 1.0100 as the last man standing before that magical 1.00 level.
EUR/USD: Daily Chart
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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