Euro rally fizzles, Eurozone CPI climbs to 2.2%

The euro is slightly lower on Tuesday after rallying 1.2% over the past two trading sessions. In the North American session, EUR/USD is currently trading at 1.0363, down 0.25% on the day.

Eurozone, German CPI rises in December

Eurozone inflation accelerated for a third successive month, climbing to 2.4% y/y in December, up from 2.2% in November and in line with the market estimate. Energy prices increased for the first time since July and services inflation rose to 4% from 3.9%, double the European Central Bank’s target of 2%. The core rate remained unchanged at 2.7%, matching the market estimate.

In Germany, the eurozone’s largest economy, inflation jumped in December and was higher than expected. Annual inflation hit 2.6%, up from 2.2% in November and above the market estimate of 2.4%. Monthly, CPI rose to 0.4%, up sharply from -0.2% in November and above the market estimate of 0.3%. With inflation rising and economic activity struggling, there is a significant possibility of stagflation, which is a combination of slow economic growth and high inflation.

How will the ECB react to the latest inflation data? The ECB lowered rates by 25 basis points in December and is likely to continue trimming rates in early 2025. The deposit interest rate of 3% is still restrictive for the weak eurozone economy. The ECB could cut rates by 25-basis points at the next meeting on January 30.

The US economy is in good shape, buoyed by a robust services sector. The S&P Global Services PMI eased in December to 56.8, down from 58.5 in November. This was followed by the ISM Services PMI rose to 54.1 in December, up from 52.1 and above the market estimate of 53.3. This points to solid expansion in the services industry.

      EUR/USD Technical

• EUR/USD is testing resistance at 1.0374. Above, there is resistance at 1.0453
• There is support at 1.0312 and 1.0233

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