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EUR/USD Exchange Rate Slashes Gains following US Inflation

Euro and US Dollar bank notes and coins.

EUR/USD Exchange Rate Volatile amid High-Impact Data

The Euro US Dollar (EUR/USD) exchange rate is trading mixed today, as it initially rose following better-than-expected German economic sentient, only to fall after the latest US inflation figures.

At the time of writing, the EUR/USD exchange rate is trading at around $1.0770, having fluctuated between $1.0758 and $1.0827.

Euro (EUR) Buoyed by German Economic Sentiment

The Euro (EUR) started the day trading slightly higher against the US Dollar (USD) following the release of better-than-expected German economic sentiment results.

The ZEW index for the Eurozone’s largest economy printed well above what was expected, striking a nine-month high of 12.8 in December, up from 9.8 in November and beating forecasts of 8.8.

This strong recovery in German economic sentiment cheered investors. The Eurozone’s largest economy has faced a long period of weak economic activity, so today’s data has boosted hopes that it may soon turn a corner. 

However, EUR/USD shed its gains later in the session as the US Dollar found fresh support.

US Dollar (USD) Recovers following Inflation Figures

The US Dollar was initially on the back foot today, before managing to recover against the Euro as the day progressed.

The rebound came after the release of the US headline and core inflation results. Both printed as expected, with core inflation holding steady at 4% and headline inflation printing at 3.1%, a drop from the previous 3.2%.

Although the results report cooling inflation, this has seen the ‘Greenback’ recoup some of its earlier losses throughout the day. The figures also contained signs that inflation remains sticky, which has led some commentators to speculate that US interest rates may remain higher for longer.

Ryan Brandham, Head of Global Capital Markets for North America at Validus Risk Management, says:

‘The figure for US Consumer Price Index came in largely as expected, with month-on-month coming in slightly higher. The market is already pricing in over four interest rate cuts in 2024.

‘However, considering that Core Consumer Price Index remains at 4%, there is risk that these cuts may not come as rapidly as the market expects. The Fed needs to see sustained decrease in inflation before taking significant action.

‘Despite today’s release closely aligning with expectations, the market reaction may be muted today, as focus shifts to the upcoming FOMC meeting tomorrow.’

EUR/USD Forecast: ECB and Fed Interest Rate Decisions in the Spotlight

Looking ahead, the Fed will announce its interest rate decision on Wednesday evening. We may see muted trade in EUR/USD ahead of the announcement, and volatility could follow.

If the Fed pushes back on market expectations for interest rate cuts, the ‘Greenback’ could surge higher.

The European Central Bank (ECB) then convenes on Thursday to set its own monetary policy. Markets expect the ECB to start cutting rates early in 2024. If the bank can’t convince markets otherwise then we could see the single currency slump.