EUR/USD Slides Amidst Weaker German Inflation Data and USD Resilience

The EUR/USD pair continues its retracement from the 1.1015 level, marking its highest point since August 10, and faces a second consecutive day of decline on Thursday, dipping to the 1.0920 area during the early European session. Several factors contribute to the downward pressure on the pair.

Wednesday’s data revealed a more substantial slowdown in German inflation than anticipated, dropping to 2.3% in November, the lowest since June 2021. Additionally, core inflation, excluding volatile food and energy prices, eased to 3.8% from the previous month’s 4.3%. These figures fuel speculations that the European Central Bank (ECB) might consider interest rate cuts in the coming year, dampening confidence in the Euro. Meanwhile, the US Dollar (USD) sees follow-through buying, recovering from Wednesday’s three-and-a-half-month low. Repositioning trades ahead of key inflation readings from both the Eurozone and the US contribute to the pressure on the EUR/USD pair.

Despite the downside, traders appear cautious about placing aggressive bearish bets on the Euro due to recent hawkish signals from the ECB. ECB Governing Council member Yannis Stournaras warned against premature speculation on interest rate cuts, echoing the minutes from the October ECB monetary meeting that indicated openness to increasing interest rates. The upcoming flash Eurozone Consumer Price Index (CPI) will be crucial in shaping Euro sentiment.

Attention will then shift to the US Personal Consumption Expenditures (PCE) data, particularly the core PCE Price Index, the Federal Reserve’s preferred measure for long-term trends. This data will be scrutinized for confirmation of a slowing inflation trend and potential implications for the timing of rate cuts in 2024. Recent statements from some Fed officials hint at the possibility of earlier rate cuts if inflation continues to decline.

Market expectations suggest the Fed may start easing its monetary policy as early as March 2024. Consequently, the upcoming inflation data will play a pivotal role in influencing the USD’s near-term trajectory and providing momentum to the EUR/USD pair. Additionally, disappointing Chinese PMI prints for November are tempering investor risk appetite, acting as a supportive factor for the safe-haven USD in the lead-up to the key data releases. Traders are bracing for heightened volatility in response to these influential economic indicators.

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