EUR/USD dips as eurozone inflation eases

The euro remains busy and is down 0.40% on Thursday, trading at 1.0624. This follows the euro gaining 0.90% a day earlier.

Eurozone inflation falls to 8.6%

The euro’s moves today and yesterday have in large part been dictated by inflation releases. Earlier today, Eurozone Final CPI came in at 8.6% for January, down sharply from 9.2% in December. Headline inflation eased for a third straight month, after hitting a peak of 10.6% in October. The core rate has not followed this downward trend and ticked higher to 5.3% y/y in January, up from 5.2% in December. The improvement in headline inflation eased worries that the ECB would have to deliver another 50-basis point hike in May, after the expected 50-bp increase at the March 16 meeting.

These concerns that the ECB would remain aggressive pushed the euro almost 1% higher on Wednesday after German inflation edged up to 9.3% in February, up from 9.2% in January and above the estimate of 9.0%. The usual suspects were at play in driving inflation higher – food and energy. The government has provided energy subsidies, but energy prices still shot up in January by 23.1% y/y, while food prices surged 20.2% in January y/y. In addition to the German inflation report, France and Spain also recorded unexpectedly strong inflation.

The eurozone data calendar will wrap up with German and eurozone Service PMIs, which have been showing improvement and are back in expansion territory, an indication of a pickup in economic activity. The German PMI is expected at 51.3 and the eurozone PMI at 52.3 points.

In the US, the Federal Reserve remains hawkish with its message that higher rates are on the way. Fed member Bostic reiterated this stance, saying that the terminal rate would be between 5% and 5.25% and have to remain at that level well into 2024. The markets have priced in a terminal rate of 5.50%, but worries over sticky inflation have led to some calls for rates to rise as high as 6%.

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EUR/USD Technical

• EUR/USD is testing support at 1.0655. Below, there is support at 1.0596
• There is resistance at 1.0765 and 1.0894

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