EUR/USD stabilizes near 1.04 as earlier gains fade following the release of European inflation data

The Euro (EUR) failed to sustain earlier gains against the US Dollar (USD) on Tuesday as Eurozone inflation data signaled an end to the recent disinflationary trend. This shift followed Monday’s release of Germany’s preliminary Harmonized Index of Consumer Prices (HICP) for December, which showed a monthly increase of 0.7%, surpassing the 0.5% forecast. On an annual basis, headline HICP inflation climbed to 2.9% from 2.4% in November.

At the same time, markets remain volatile amid uncertainty surrounding President-elect Donald Trump’s tariff plans. A Washington Post report suggested Trump was considering simplifying his approach by introducing a universal tariff on critical imports. However, Trump later refuted these claims, affirming that his original tariff schemes would remain unchanged.

Daily Digest Market Movers: Inflation Data Shakes the Market

• The French preliminary HICP for December showed a 0.2% monthly increase, below the 0.4% expectation but higher than November’s -0.1%. Yearly inflation came in at 1.8%, slightly up from 1.7% in November.
• Eurozone preliminary HICP data for December revealed:
• A 0.4% monthly increase, reversing the previous month’s -0.3% decline.
• A yearly inflation of 2.4%, matching expectations, up from 2.2% in November.
• Core HICP surged to 0.5%, beating November’s -0.6%.
• The yearly core HICP came in at 2.8%, slightly above the 2.7% forecast.
• The European Central Bank (ECB) is still projected to cut its policy rate by 25 basis points on January 30.
• Italy’s inflation pattern mirrored that of Germany, with December’s preliminary HICP showing a 0.1% monthly rise, compared to November’s -0.1%.
• German Bund yields rose last week and peaked at 2.47% on Monday, but eased slightly to around 2.45% today.
• European equities are showing a positive turn, rising after the release of inflation data.

Technical Analysis: EUR/USD Faces Critical Crossroads

EUR/USD has experienced a solid technical bounce, finding support at 1.0294 and rallying to nearly 1.0448. The key question now is whether the Euro can push past 1.0450. If European bonds lose their momentum from Monday’s highs, the Euro may struggle to extend higher toward the 1.05 mark.

The first significant level to break is 1.0448, the low from October 3, 2023. A breakthrough here could lead to the 55-day Simple Moving Average (SMA) at 1.0558. However, this move will likely require an additional catalyst to squeeze the Dollar bulls.

On the downside, the 1.0294 level now serves as the first line of defense, acting as a crucial support after Monday’s rally. Should this break, the two-year low at 1.0224 becomes the next key level. A move below 1.02 would mark a fresh two-year low and could set the stage for a potential move toward parity, with 1.0100 serving as the last support before reaching the psychological 1.00 level.