EUR/USD rebounds from lows as attention turns to Eurozone HICP data

Euro Makes Slight Gains Against the Dollar

The euro (EUR) is edging up against the US dollar (USD), currently trading at 1.1825, which is fairly close to its weekly low of 1.1775. The disappointment stemming from the Eurozone’s HCOB Services Purchasing Managers’ Index (PMI) hasn’t heavily impacted the currency, as traders seem cautious, awaiting January’s preliminary Harmonized Index of Consumer Prices (HICP) before committing to any investment decisions.

Consumer prices within the Eurozone are predicted to hold steady below the European Central Bank’s (ECB) target of 2%, which, I think, suggests that the ECB might maintain interest rates as anticipated this Thursday. However, there’s an underlying concern that inflation could slow more than expected, possibly prompting further interest rate cuts that might weaken the euro.

On the flip side, the US dollar has demonstrated resilience. Recently, President Trump signed a bill that concluded a brief government shutdown, which has brought some relief to markets, celebrating the appointment of Kevin Warsh as the new Federal Reserve Chair, replacing Jerome Powell. Warsh is generally viewed as a cautious figure regarding interest rate cuts and values the central bank’s independence.

Looking at the economic calendar, the final services PMI data will shed light on the sector’s health and could sway the euro’s performance, particularly ahead of Eurozone inflation figures. In the U.S., investors are closely watching the ADP employment change report, especially since the recent government shutdown has delayed the release of key non-farm payrolls data.

Today’s Market Overview: Euro’s Modest Recovery

• The euro has shown signs of recovering from its recent lows, yet remains far from the heights it reached last week. Investors are keeping an eye on upcoming Eurozone inflation data, which could provide insights into the ECB’s upcoming monetary policy.
• The HCOB Services PMI data from early Tuesday indicated that sector activity has dipped to a four-month low of 51.6, falling short of the preliminary 51.9 and down from December’s 52.4.
• Additionally, Germany’s HCOB services PMI was also revised downward to 52.4 from the earlier figure of 53.3, showcasing a similar downward trend from December’s 52.7. These numbers really point to a sluggish business climate in the Eurozone’s major economies.
• Preliminary HICP data for January is expected to contribute to easing price pressures, with a projected year-on-year growth of 1.7%, which is a dip from December’s 1.9% and November’s 2.1%. It’s worth noting that core HICP—more significant for monetary policy—is anticipated to grow steadily at 2.3% per year.
• Simultaneously, the Eurozone Producer Price Index is likely to indicate increasing deflationary pressures, expected to show a decline of 2.3% year-on-year in December, following a 1.7% dip in November, suggesting that a strong euro is suppressing inflation.
• In the U.S., attention will be on the ADP private employment numbers for January, which are set to be the main employment update this week. Job creation may see an uptick to 48,000 for last month, up from December’s 41,000, although that still feels relatively low.

Technical Outlook: EUR/USD Needs to Break 1.1875 for Trend Shift

The EUR/USD pair has been gradually recovering from Monday’s low of 1.1775. Indicators on the 4-hour chart show a reduction in bearish pressure. The Moving Average Convergence Divergence (MACD) is nearing a crossover that could suggest bullish movement, and the Relative Strength Index (RSI) sits just below the critical 50 line that distinguishes bullish from bearish sentiment.

Nevertheless, price movement remains within the trading range established on Monday. For a confirmed recovery, bulls will need to break above the weekly resistance at 1.1875, aiming for the range between the January 29 high of 1.1995 and the psychological level of 1.2000.

Immediate support is placed at the lows observed on February 2nd and 3rd around the 1.1775 area. Should prices fall further, bears might target the January 21 low near 1.1660.