The euro is showing limited movement on Monday. In the European session, EUR/USD is trading at 1.0948, down 0.02%.
German inflation is on the rise
Germany’s inflation rate climbed to 3.7% y/y in December, up from 3.2% in November, which was a two-year low. We’ll get the final estimate on Tuesday. The main contributor to the upswing was a base effect due to a one-time government subsidy for energy expenses in December 2022. The subsidy cooled inflation in December 2022 and resulted in the upswing in December 2023. Core inflation, which excludes energy and food prices, rose 4.5% y/y in the preliminary estimate, down sharply from 5.5% in November. The eurozone releases final CPI for November on Wednesday.
ECB policy makers can point to impressive progress in the battle to bring down inflation. In November, CPI fell to 2.4%, down sharply from 2.9% in October. A year ago, inflation was running at a clip of 10.1%. With inflation closing in on the 2% target, the burning question is the timing of rate cuts. The markets have priced in a first rate cut as early as March but the ECB, unlike the Federal Reserve, isn’t jumping on the rate-cut bandwagon just yet.
ECB Chief Economist Philip Lane said on Friday that lowering rates would not be high on the ECB’s agenda until the ECB was convinced that “we are firmly on our way back to 2% inflation”. This stance echoed comments from ECB President Lagarde a day earlier. Lane had a warning for the markets, saying that cutting rates too fast could trigger higher inflation. The markets have priced in at least 150 basis points in cuts and expect the first cut in March.
EUR/USD Technical
- EUR/USD is putting pressure at resistance at 1.0954. Above, there is resistance at 1.0996
- 1.0908 and 1.0866 are the next support levels
