EURUSD Ticks Lower As Weaker German Inflation Confirmed, ECB Still In A Bind

Euro Main Talking Points

• Germany CPI rate confirmed at a more-than two-year low
• However, it’s still above target and the economy is shaky
• EUR/USD is holding on above 1.07

The Euro was weaker but not far from its opening levels in European trade Friday, in a session with little to offer in the way of scheduled trading cues.

The big one on the EUR side of EUR/USD has already passed. Headline German inflation was confirmed at its weakest level for two and a half years. The Consumer Price Index rose by an annualized 2.9% in December, below November’s 3.1% and continuing the downtrend seen since the peaks above 8% in early 2023.

While inflation is heading in the right direction as far the European Central Bank is concerned, Germany presents a microcosm of European rate-setters’ problems. Prices may be weakening but they remain above target and vulnerable to resurgence thanks to any number of factors, from domestic wage bargaining to supply chain shocks thanks to conflict in Gaza and Ukraine.

And this comes against a backdrop of shaky economic growth. Global markets may be only too well aware that the Federal Reserve wants to wait until it has a clear inflation picture before cutting rates. The ECB’s position is if anything trickier. Growth is weaker, inflation stronger.

Still, for now markets seem content to believe that continued weak data will mean that record-high Eurozone rates will come down when next they move, and, although this may not happen soon, the prospect continues to keep the Euro in check.

It lost a lot of ground to the Dollar last week, when the Fed caused a huge pushing back of US rate-cut expectations, and hasn’t made much of it back.

However, as with other Dollar pairs, it is notable that recent trading ranges have been respected, which is likely to be the case at least until the monetary picture is more certain.

The ECB won’t set rates again until March 21, which is probably going to seem like an even longer time in the markets than it is. Central bankers’ comments will likely rule the market until then.

EUR/USD Technical Analysis

EUR/USD Daily Chart Compiled Using Trading View

The Euro is bubbling away just below resistance at its 100-day moving average. The pair plunged below this during last week’s savage bout of US Dollar strength and hasn’t managed to retake it since. It comes in at 1.07868 which is where the bulls were beaten back on Thursday and where they’ve already retreated again early in Friday’s session.

While the broad downtrend from December remains in play the channel base hasn’t faced any serious test since early January. As such its validity as an indicator of substantial support may be fading out. However the trading band between December 5’s intraday high of 1.08594 and December 8’s low of 1.0752 would still seem to have some relevance as a possible directional indicator and , as it seems likely to face another downside test shortly, traders should keep an eye on it.

–By David Cottle for DailyFX