EUR/USD steady after eurozone inflation dips

• Eurozone inflation falls to 2.6%
• Eurozone unemployment rate drops to record low of 6.4%

The euro is calm on Friday. In the European session, EUR/USD is trading at 1.0818, up 0.13%.
Eurozone inflation eases to 2.6%

Inflation continues its downward trend in the eurozone. On Thursday, Germany and France saw inflation fall in February. The eurozone followed suit on Friday, as headline inflation dropped to 2.6% y/y in February, down from 2.8% in January.

This was the lowest rate in three months but was above the market estimate of 2.5%. A sharp drop in energy prices was the main reason for the drop in inflation. However, February inflation rose 0.6% m/m, higher than expected and above the January reading of -0.4%. This upswing was mainly due to services inflation which remains sticky and this will be a concern for the European Central Bank.

The core inflation rate, which excludes food and energy, fell to 3.1% in February, down from 3.3% in January but higher than the market estimate of 2.9%.

The slight decline in inflation is welcome news but is unlikely to have much sway on policy makers at the ECB, as the drop was mainly due to base effects. The ECB remains concerned about cutting rates too early and then having to deal with inflation reversing directions and accelerating. The next meeting is on March 7^th and the central bank is expected to maintain the deposit rate at 4.0%.

Overshadowed by the inflation release was the eurozone unemployment rate, which ticked lower to 6.4% in January, down from a revised 6.5% in December and matching the market estimate. This was the lowest level since the formation of the eurozone in 1999. (The initial December release came in at 6.4% but was revised upwards to 6.5%.)

The impressive unemployment rate points to a robust labour market, which is surprising given that the economy has been in poor shape. The solid labour market and strong wage growth means there is less pressure on the ECB to lower interest rates.

EUR/USD Technical

• EUR/USD is testing resistance at 1.0819. Above, there is resistance at 1.0842
• 1.0782 and 1.0759 are providing support

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