The EUR/USD pair surged to near 1.0270 in Tuesday’s North American session, following the release of the United States (US) Producer Price Index (PPI) data for December, which came in lower than expected. The month-on-month headline PPI increased by a modest 0.2%, and the core PPI, excluding volatile food and energy prices, remained flat. On a year-over-year basis, the headline PPI rose by 3.3%, faster than November’s 3.0%, but slower than the anticipated 3.4%. The core PPI grew by 3.5%, slightly ahead of the 3.4% rise in November but below the expected 3.8%.
The immediate reaction to the data was slightly bearish for the US Dollar, which surrendered its earlier intraday gains and caused the US Dollar Index (DXY) to flatten around 109.50. Despite the softer PPI data, the near-term trend for the US Dollar remains strong, as futures prices on the 30-Day Fed Funds indicate a higher probability of only one interest rate cut from the Federal Reserve (Fed) this year. This is a reduction from the two rate cuts forecasted by the Fed’s Summary of Economic Projections (SEP), highlighting a less dovish outlook.
Traders have adjusted their dovish bets on the Fed due to strong labor demand in the US, as indicated by the latest Nonfarm Payrolls (NFP) data. This has bolstered expectations of a strong economic outlook. Moreover, inflationary pressures are expected to remain sticky, particularly with the anticipated policies of President-elect Donald Trump, such as immigration controls, tariff hikes, and tax cuts, which are likely to stimulate aggregate demand and boost growth.
Looking ahead, investors are turning their attention to the US Consumer Price Index (CPI) data for December, which will be released on Wednesday, for further insights into inflation dynamics.
Euro Strengths and ECB Outlook
The Euro (EUR) outperformed its peers on Tuesday, pushing EUR/USD higher despite ongoing concerns over the European Central Bank’s (ECB) likely policy actions. ECB officials continue to support market expectations for further policy easing, driven by a weak Eurozone economic outlook. This is compounded by fears of potential tariff hikes under President-elect Trump’s administration, which could hurt the export-driven Eurozone economy.
ECB policymaker and Bank of Finland Governor Olli Rehn stated on Monday that the ECB could leave restrictive monetary policy territory by “midsummer,” with expectations for easing well into 2025. Rehn’s comments also downplayed concerns about the potential effects of Trump’s trade policies, noting that firms would likely find ways to circumvent tariffs and that a decline in trade between China and the US had masked such trends.
However, despite this relatively optimistic stance, market participants still expect the ECB to cut interest rates in its next four policy meetings, potentially bringing the Deposit Facility rate down to 2%. Analysts at Barclays also project that the Eurozone economy will start 2025 on a weak note, particularly with ongoing sluggishness in Germany’s manufacturing sector.
In summary, while the Euro continues to perform well against its peers, particularly the US Dollar, concerns over the Eurozone’s economic health and the ECB’s likely policy response will likely weigh on the Euro in the longer term. Meanwhile, the US Dollar remains buoyed by strong labor data and expectations for fewer interest rate cuts by the Fed.
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