On Tuesday, the euro-dollar pair tested the 1.0400 level again, influenced by inflation data from the Eurozone. For the second consecutive day, buyers of the EUR/USD pair tried to establish a foothold above the 1.0400 threshold, benefiting from general weakness in the dollar and temporary strength in the euro. On Monday, traders responded to Germany's inflation report, followed by the Eurozone's equivalent report on Tuesday. While both reports supported the euro, the pair still struggles to maintain its position within the 1.0400 range.
This hesitation suggests that buyers of the EUR/USD are cautious about further upward movement, opting to lock in profits as the pair approaches the 1.0430 resistance level, which aligns with the midline of the Bollinger Bands indicator and the Kijun-sen line on the daily timeframe. This caution is understandable, especially considering that key U.S. labor market data for December will be released later this week. Additionally, an increase in inflation in the Eurozone does not necessarily imply that the European Central Bank (ECB) will pause its monetary easing measures.
Key Figures
All components of Germany's CPI report released on Monday exceeded expectations. The headline Consumer Price Index (CPI) increased to 2.6% year-over-year, marking the fastest pace of growth since January 2024 and the third consecutive month of acceleration. The Harmonized CPI rose to 2.9% YoY, surpassing the 2.6% forecast, also hitting its strongest level since January 2024.
The latest Eurozone CPI report indicates a rise in inflation, with all figures meeting forecasts. The headline CPI increased to 2.4% in December, continuing an upward trend for three consecutive months. In September, the CPI had fallen below the ECB's target of 2% for the first time since 2021.
The Core CPI remained unchanged at 2.7% for the fourth month in a row. Additionally, inflation in the services sector increased to 4.0%, up from 3.9% in November, suggesting that price pressures in services persist, even as other inflation components show signs of slowing down.
Market Reaction
Despite the growth in the CPI and the stagnation of the core figure, the EUR/USD currency pair was unable to break above the resistance level of 1.0430 decisively. This suggests that the report did not provide buyers with enough momentum for a meaningful correction or a significant rally.
This lack of momentum can be attributed to the fact that the report is unlikely to change expectations for a rate cut at the ECB's next meeting. The ECB's monetary policy approach takes into account broader economic trends rather than focusing solely on isolated indicators, even those as impactful as CPI.
Numerous macroeconomic indicators suggest the ECB will continue its easing policy. For example, the Eurozone labor market is cooling, and wage growth is slowing. Unemployment in the Eurozone remains at a record high of 12.1%, with youth unemployment at 24.2%.
The outlook for economic growth in the Eurozone remains weak. Last week, the Purchasing Managers' Index (PMI) for the manufacturing sector was revised downward from 45.2 to 45.1, indicating that it has remained in contraction territory for the second consecutive month. Similarly, Germany's manufacturing PMI is also in contraction territory, sitting at 45.2.
In light of these findings, ECB Governing Council member Yannis Stournaras, who is the head of the Bank of Greece, stated that interest rates could fall to around 2% by autumn this year. This prediction is consistent with the expectations of many analysts and currency strategists, who anticipate rate cuts at every ECB meeting through mid-2025.
JOLTS + ISM Reports
The Eurozone CPI report provided only temporary and limited support for EUR/USD buyers, who could not maintain their position above the 1.0400 target, especially after the release of U.S. macroeconomic data.
The JOLTS report indicated that the number of job openings in the U.S. at the end of November rose to 8.09 million, surpassing the forecast of 7.7 million. In addition, the ISM Services Index for December was stronger than expected, increasing to 54.1 from a forecast of 53.5. This indicator has remained in expansion territory since July 2024.
These developments suggest that any corrective spikes in EUR/USD present opportunities to open short positions. The initial downside target is 1.0340, corresponding to the Tenkan-sen line on the daily chart, with the primary target set at 1.0270, which aligns with the lower Bollinger Bands line on the same timeframe.
