The euro is slightly higher on Tuesday. In the European session, EUR/USD is trading at 1.0528, down 0.23% at the time of writing.
German inflation climbs to 2.2%
Germany, the largest economy in the eurozone, remains a shadow of what was once the undisputed locomotive of Europe. Economic growth has sputtered and there is political instability, with an election called in February 2025 after the coalition government collapsed in November.
German inflation rose to 2.2% y/y in November, up from 2% in October and matched the preliminary estimate. This was the highest level in four months. Service inflation was unchanged at 4%, double the European Central Bank’s target of 2%. Core inflation, which excludes volatile food and energy prices, rose to 3%, a six-month high. The inflation data raises hopes that the German economy may be showing signs of stronger activity.
Today’s inflation report comes just two days before the ECB rate announcement. The markets have fully priced in a rate cut, with around an 85% probability of a 25-basis point cut. There is around a 15% possibility of a jumbo 50-bp cut, although hawkish members such as Isabel Schnabel favor a gradual approach of 25-bp increments.
If the ECB lowers rates on Thursday, as expected, it will mark the fourth rate cut this year. The ECB has shown that it is willing to cut rates but there are some dark clouds that may force the ECB to be even more aggressive. France is in political turmoil after the government fell last week and there is the burning question of whether President-elect Trump will make good on his promise to slap US trading partners with tariffs. The fragile eurozone economy runs a real risk of tipping into a recession and ECB policymakers will have to balance the weak economy against the upside risk of inflation in determining how fast to cut interest rates.
EUR/USD Technical
- EUR/USD is testing support at 1.0526. Below, there is support at 1.0497
- There is resistance at 1.0560 and 1.0589
