EUR/USD gains ground as eurozone CPI dips

EUR/USD has edged higher in the European session and trading at 1.0890, up 0.18% on the day. The euro had a strong day on Thursday, gaining 0.50%.

Eurozone CPI eases to 2.8%

Inflation continues to fall in the eurozone, although the drop was very modest. CPI eased to 2.8% y/y in January, down from 2.9% in December and in line with the market estimate. Monthly, CPI declined by 0.4% in January, after a 0.2% gain in December, matching the market estimate. Food and energy prices decelerated in January and were the drivers behind the modest dip in inflation.

Core CPI, which excludes food and energy and is a better gauge of inflation trends, dropped from 3.4% to 3.3% y/y but was above the market estimate of 3.2%. This could be a source of concern for policy makers at the European Central Bank, as the core rate remains well above the ECB’s 2% target. There are concerns about inflation risks to the upside, with higher transport prices due to attacks on ships in the Red Sea and the Israel-Hamas war.

The ECB remains cautious and ECB President Christine Lagarde said last week that the Middle East crisis was an “upside risk” to inflation. Lagarde said this week that the eurozone was “on a disinflationary trend” and that the ECB would be cutting rates. So in which direction is the ECB headed?

Lagarde may be signalling that although she is on board for rate cuts, she remains concerned about inflation risks to the upside and may take her time before starting to chop rates. The ECB has kept rates unchanged at 4.0% for four straight months, and the markets are eyeing April or June as the dates for an initial rate cut.

Will NFP ease in January?

All eyes are on the US nonfarm payroll report later today. Earlier this week, the ADP employment report showed a drop in January, from a downwardly revised 158,000 to 107,000. The ADP report isn’t considered a reliable guide for nonfarm payrolls, but the markets are expecting NFP to decline as well. The consensus estimate stands at 180,000, compared to 216,000 in December. If the release is wide of the estimate, we could see a strong reaction from the US dollar.

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EUR/USD Technical

• EUR/USD is putting pressure on resistance at 1.0905. Above, there is resistance at 1.0938
• There is support at 1.0810 and 1.0748

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