- The Euro bounces further against the US Dollar on Monday after hitting 1.0224 last week.
- Traders assess the impact possible universal US tariffs with political turmoil in Italy, Austria, and Canada.
- Markets assess European PMI and preliminary Germany’s inflation data for December this Monday.
The Euro is setting forth a second day of recovery and trades above 1.0400 at the time of writing on Monday, after President-elect mulls initiating universal tariffs for only critical imports. The positive move is further bolstered by the December Purchasing Managers Index (PMI) releases, with Spanish, Italian, French, German, and the broader Eurozone data recovering from prior month readings and beating expectations.
Markets are also sending the Euro higher due to global political turmoil. Italian Prime Minister Giorgia Meloni broke the unified European ranks by visiting President-elect Donald Trump at Mar-a-Lago, while Canadian Prime Minister Justin Trudeau is set to resign this week, according to Bloomberg News. Meanwhile headlines came out from the Washington Post that mentioned President-elect Donald Trump is mulling possible universal tariffs over critical imports instead of dispersed individual ones.
Meanwhile, markets are bracing for the first normal trading week of the year regarding the economic calendar. Traders will return to their trading desks, and financial markets are expected to run back to their normal capacity. It is a very packed calendar for both Europe and the US, with the US Nonfarm Payrolls release on Friday as the main focal point for this week.
Daily digest market movers: CPI ticks up
- President-elect Donald Trump is mulling possible universal tariffs only on critical imports, according to the Washington Post.
- The Spanish HCOB PMI for the Services sector came in at 57.3, above the 54.1 expected and the 53.1 previous reading.
- The Italian HCOB Services PMI recovered from contraction and came in at 50.7, above the 50.0 estimate and better than the previous 49.2 reading.
- France’s HCOB Services PMI rebounded to 49.3, coming from 48.2 the previous month and beating the estimate of 48.2.
- Germany’s HCOB Services PMI reading came in at 51.6, above the estimate and previous reading of 51.4.
- The German Consumer Price Index (CPI) has been released. The December preliminary reading ticked up by 0.7% against the expected 0.4% on a monthly basis compared to the -0.2% in the prior month. The preliminary CPIrose to 2.9% against the previous 2.4% year-over-year.
- At 14:45 GMT, S&P Global will publish the US Services PMI reading. The final December reading is expected to remain stable at 58.5.
Technical Analysis: Euro gains 1% on the day
EUR/USD has seen traders quickly add to their short positions that were unwinded before Christmas, triggering a meltdown to 1.0224 last week. With the oversold Relative Strength Index (RSI), a bounce could unfold to 1.04 or even 1.0448 if the current European data adds to the momentum.
On the upside, the 1.04 big figure is the first level to watch for. Next is the pivotal level at 1.0448, the low of October 3rd, 2023. Once through that level, the 55-day Simple Moving Average (SMA) at 1.0565 comes into play.
On the downside, the current two-year low at 1.0224 is the first support to be retested. Further down, the pivotal level at 1.02 would mean a fresh two-year low. That 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
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.
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