EUR/USD clings to gains with US inflation on the horizon

• EUR/USD locks in key resistance of 1.0300 after recovering from over a two-year low of 1.0175, with the US CPI data for December in focus.
• The US Dollar faces pressures after softer-than-expected US PPI data for December.
• ECB’s Holzmann expects the path towards the neutral rate won’t be straightforward.

EUR/USD holds onto gains near 1.0300 at the expense of the US Dollar (USD). The Euro (EUR) performs weakly against its major peers on Wednesday as investors are cautious ahead of President-elect Donald Trump's return to the White House. Higher import tariffs from Trump’s administration are expected to falter the Eurozone’s exports, making them costlier for US importers.

Rising concerns over Eurozone economic growth and price pressures remaining broadly under control have boosted expectations of more interest rate cuts from the European Central Bank (ECB) this year. The ECB cut its Deposit Facility rate by 100 basis points (bps) in 2024 and is expected to cut a full percentage point again by mid-summer to reach 2%.

In Wednesday's European session, ECB policymaker and Governor of the Bank of France François Villeroy de Galhau said, "It makes sense for interest rates to reach 2% by the summer" as we have practically won the "battle against inflation". Villeroy warned about deepening "downside risks to French growth outlook" but doesn't see a "recession" happening anytime soon.

While a lot of ECB policymakers are comfortable with market expectations for the ECB to reduce interest rates by 25 bps at each of the next four policy meetings, ECB policymaker and Austrian Central Bank Governor Robert Holzmann expects the path to lower rates is not as “straightforward as it seems”. Holzmann added that the core inflation is currently “closer to 3% than to 2%” and highlighted some energy-related challenges that could impact the ECB’s decisions.

Daily digest market movers: EUR/USD mutes ahead of US CPI data

• EUR/USD stays firm near 1.0300 in Wednesday’s European session after a strong recovery on Tuesday. The major currency pair consolidates as investors await the United States (US) Consumer Price Index (CPI) data for December, which will be published at 13:30 GMT. Investors will pay close attention to US inflation as it will influence market speculation for the Federal Reserve’s (Fed) monetary policy outlook.
• Month-on-month headline inflation is estimated to have grown steadily by 0.3%. In the same period, the core CPI – which excludes volatile food and energy items – is expected to have risen by 0.2%, slower than the former release of 0.3%. Economists expect the annual headline CPI to have accelerated to 2.9% from 2.7% in November, with core reading rising steadily by 3.3%.
• Signs of stubborn price pressures could accelerate expectations that the Fed will avoid cutting interest rates this year. While some slowdown in inflationary pressures is unlikely to boost Fed dovish bets as investors expect incoming policies under Trump’s administration, such as immigration controls, tax cuts, and tariff hikes, would fuel growth rate.
• Ahead of the US inflation data, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slips to near 109.00. The US Dollar (USD) corrected sharply on Tuesday after the release of the US Producer Price Index (PPI) data for December, which showed that producer inflation grew at a slower-than-expected pace.
• According to the CME FedWatch tool, traders expect the Fed to cut interest rates just once this year, compared to two rate cuts projected by Fed officials in December’s Summary of Economic Projections (SEP). Traders pare dovish bets after the release of the surprisingly upbeat US Nonfarm Payrolls (NFP) data for December on Friday. 

Technical Analysis: EUR/USD rebounds to near 1.0300 on divergence with momentum oscillator

EUR/USD rebounds to near 1.0300 after gaining ground from the over-two-year low of 1.0175 reached on Monday. The major currency pair bounces back on divergence in momentum and price action. The 14-day Relative Strength Index (RSI) formed a higher low near 35.00, while the pair made lower lows.

However, the outlook of the shared currency pair is still bearish as all short-to-long-term Exponential Moving Averages (EMAs) are sloping downwards.

Looking down, Monday’s low of 1.0175 will be the key support zone for the pair. Conversely, the January 6 high of 1.0437 will be the key barrier for the Euro bulls.