EUR/USD rebounds as US Dollar ticks lower ahead of US inflation data

• EUR/USD recovers to near 1.0270 as the US Dollar performs subduedly as investors focus on the US PPI data for December.
• President-elect Donald Trump’s policies are expected to boost US inflation and growth.
• ECB’s Rehn sees monetary policy restrictions concluding by mid-summer.

EUR/USD  extends its recovery from Monday’s over-two-year low of 1.0175 and trades near 1.0270 in Tuesday’s European session. The major currency pair rebounds as the US Dollar (USD) witnesses a marginal correction, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trading subduedly around 109.50.

However, the strong near-term trend in the US Dollar remains intact. According to the CME FedWatch tool, the 30-Day Fed Funds futures prices signal higher probabilities for only one interest rate cut from the Federal Reserve (Fed) this year, compared to two rate cuts shown by the dot plot at the latest Fed Summary of Economic Projections (SEP).

Traders have trimmed Fed dovish bets on the back of robust labor demand, as shown by the latest United States (US) Nonfarm Payrolls (NFP) data released on Friday, which signifies a strong economic outlook. Also, market participants expect inflationary pressures to remain stubborn under President-elect Donald Trump’s administration as incoming policies, such as immigration controls, tariff hikes, and lower taxes, will boost aggregate demand and growth.

For fresh cues on the current status of inflation, investors will focus on the US Consumer Price Index (CPI) data for December, which will be released on Wednesday.

In Tuesday’s session, investors will focus on the US Producer Price Index (PPI) data for December, which will be published at 13:30 GMT. Annual headline PPI is estimated to have accelerated to 3.4% from 3% in November. In the same period, the core PPI – which excludes volatile food and energy items – is expected to have grown by 3.7%, faster than the previous release of 3.4%.

Daily digest market movers: EUR/USD gains at US Dollar’s expense

• EUR/USD rebounds at the expense of the US Dollar. The outlook of the Euro (EUR) remains weak as European Central Bank (ECB) officials continue to support market expectations of further policy-easing, which have stemmed from a weak Eurozone economic outlook amid fears that US President-elect Donald Trump could slap hefty tariff hikes on the old continent, a scenario that could weaken the export sector.
• ECB policymaker and Bank of Finland Governor Olli Rehn said in a conference on Monday that he expects the monetary policy to leave the restrictive territory in the coming months, at the latest by “midsummer”. However, Rehn’s comments indicated he is not worried about the Trump trade. Rehn argued that firms would find ways to “circumvent” them and even a recent decline in direct trade between China and the US was masking such a trend, Reuters reported.
• Market participants expect the ECB to cut interest rates in each of their next four policy meetings, suggesting that the Deposit Facility rate will come down to 2%. Analysts at Barclays expect the Eurozone to start 2025 on a weak note, notably due to a “significant sluggishness“ in Germany’s manufacturing sector.

Technical Analysis: EUR/USD rebounds from a two-year low of 1.0175

EUR/USD bounces to near 1.0270 in Tuesday’s European session after refreshing its more-than-two-year low around 1.0175 on Monday. However, the outlook for the major currency pair is broadly bearish as the 20-week Exponential Moving Average (EMA) at 1.0585 is declining. 

The 14-week Relative Strength Index (RSI) slides below 30.00, indicating a strong downside momentum. 

Looking down, the pair could find support near the October 2022 high near 1.0100. Conversely, the January 6 high of 1.0437 will be the key barrier for the Euro bulls.