EUR/USD eyes German inflation

EUR/USD is slightly lower on Wednesday. In the North American session, the euro is trading at 1.0751, down 0.20%.

German inflation expected at 0.2%

Germany’s CPI is expected at 0.2% m/m on Friday, which would confirm the initial estimate from two weeks earlier. On an annualized basis, the initial estimate for CPI came in at 2.9% in January, down sharply from 3.7% in December. A deceleration in energy and food costs was the driver of the downturn in January, which was the lowest inflation rate since June 2021. Core inflation has also been falling, with the initial estimate showing a drop to 3.4%, its lowest rate since June 2022.

The drop in German inflation is not all that surprising, as the eurozone’s largest economy has been struggling. Germany’s manufacturing sector has been in prolonged decline and the services sector is sputtering, with five declines in the past six months. The economy declined in the fourth quarter and another contraction in Q1 would mean that Germany will have entered a technical recession. The eurozone is also grappling with a weak economy, with the latest evidence earlier this week as retail sales declined 1.1% m/m in December.

Despite weak economic conditions in the eurozone and Germany, the European Central Bank has been hesitant to cut interest rates. ECB members have expressed concern that inflation could make a comeback if the ECB were to cut rates too early. That could force the ECB to raise rates again and the optics of such a zig-zag would be disastrous. For now, the ECB remains hawkish on rate policy and is content to continue holding rates until inflation falls closer to the 2% target.

Since last week’s Fed meeting, a host of Fed members have delivered the message that inflation is heading in the right direction but the Fed plans to be patient and is in no rush to lower rates. The markets have taken note of the Fed’s pushback and have pared expectations of a rate cut in March to 18%, down from over 70% in January, according to the CME’s Fed Watch tool.

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EUR/USD Technical

• EUR/USD tested support at 1.0746 earlier. Below, there is support at 1.0704
• There is resistance at 1.0822 and 1.0864

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