The euro edged slightly higher in the European market on Wednesday against a basket of global currencies, trading within a narrow range against the US dollar, as investors refrained from building new positions ahead of the release of key inflation data in Europe and very important economic data from the United States.
Despite easing price pressures in Germany during December, markets continue to rule out any retreat by the European Central Bank from current interest rate levels this year, supported by the resilience of economic activity in the euro area, which has recently delivered performance exceeding expectations.
Price overview
• Euro exchange rate today: The euro rose by around 0.15% against the dollar to 1.1703, from the day’s opening level of 1.1688, after recording a low of 1.1684.
• The euro ended Tuesday’s trading down about 0.3% against the dollar, resuming losses that had paused the previous day during a recovery from a four-week low at 1.1659.
• These losses were attributed to data showing a sharper-than-expected slowdown in inflation in Germany and France, which eased inflationary pressure on policymakers at the European Central Bank.
US dollar
The US dollar index fell by 0.1% on Wednesday, reflecting a decline in the US currency against a basket of major and secondary currencies, as investors avoided opening new long positions ahead of key economic data from the United States.
Later today, a series of US data releases are due, including private sector employment figures for December, job openings at the end of November, and the Institute for Supply Management’s survey on services sector activity in December.
These data are expected to provide further evidence on the likelihood of the Federal Reserve continuing to cut US interest rates over the course of this year.
European interest rates
• Money markets continue to price the probability of a 25 basis point cut in European interest rates in February at below 10%.
• Traders expect the European Central Bank to keep interest rates unchanged throughout this year, especially if inflation remains close to its 2% target.
Inflation in Europe
To reassess the above expectations, investors are awaiting the release later today of headline inflation data for Europe for December, which will clarify the extent of inflationary pressures facing policymakers at the European Central Bank.
By 10:00 GMT, the annual consumer price index for Europe is due. Market expectations point to a rise of 2.0% in December, down from 2.1% in November, while core inflation is expected to remain at 2.4%, in line with the previous reading.
Euro outlook
Here at Economies.com, we expect that if inflation data come in cooler than currently anticipated by markets, the likelihood of European interest rate cuts this year will increase, which would imply renewed downward pressure on the euro’s exchange rate in the foreign exchange market.
