it is slightly lower on Wednesday. In the North American session, the euro is trading at 1.0751, 0.20% less.
German inflation expected at 0.2%
Germany’s CPI is expected to reach 0.2% mom on Friday, which would confirm the initial estimate from two weeks earlier. On an annualized basis, the initial CPI estimate was 2.9% in January, well below the 3.7% in December. Slowing energy and food costs were the driver of January’s slowdown, which was the lowest inflation rate since June 2021. Core inflation has also been falling, with the initial estimate showing a drop to 3 .4%, its lowest rate since June 2022. .
The drop in German inflation is not all that surprising, as the eurozone’s largest economy has been struggling. Germany’s manufacturing sector has been in prolonged decline and the services sector is faltering, with five declines in the past six months. The economy fell in the fourth quarter and another contraction in the first quarter would mean Germany would have entered a technical recession. The eurozone is also grappling with a weak economy; The most recent evidence was earlier this week when retail sales declined 1.1% month-on-month in December.
Despite weak economic conditions in the eurozone and Germany, the European Central Bank has been reluctant to cut interest rates. ECB members have expressed concern that inflation could return if the ECB were to cut rates too soon. That could force the ECB to raise rates again and the optics of such a zigzag would be disastrous. For now, the ECB remains aggressive on rate policy and is content to continue holding rates until inflation moves closer to the 2% target.
Since last week’s Fed meeting, a number of Fed members have conveyed the message that inflation is heading in the right direction, but the Fed plans to be patient and is in no rush to lower rates. Markets have taken note of the Federal Reserve’s reaction and reduced expectations for a rate cut in March to 18%, down from more than 70% in January, according to CME’s Fed Watch tool.
- EUR/USD tested support at 1.0746 earlier. Below, there is support at 1.0704
- There is resistance at 1.0822 and 1.0864