The euro has rebounded against the US dollar over the past two trading days on news that the US president-elect may consider a gradual pace of hiking tariffs. However, the trend may be vulnerable to the upcoming US CPI, which is expected to remain sticky in December.
The euro-dollar pair, EUR/USD, rebounded after hitting a fresh two-year low of 1.0176 on Monday. By Tuesday, the pair extended gains, maintaining levels above 1.03 in the early hours of Wednesday’s Asian session.
The comeback in other currencies against the dollar was broad-based as the greenback retreated sharply following a Bloomberg report that Donald Trump’s incoming economic team is considering gradual tariff hikes. Currency markets also saw a shift in positioning as traders may have hedged ahead of the release of US consumer price index (CPI) data.
Tariff uncertainty drives market sentiment
The euro has plunged 9% against the US dollar since September, driven by the Federal Reserve’s hawkish policy stance and market jitters surrounding Trump’s election victory. However, news that the President-elect may adopt a narrow or gradual tariff strategy has supported the euro.
Last week, the Washington Post reported that Trump’s aides were exploring a narrower tariffs plan, only focusing on certain critical sectors. However, the President-elect denied the report on his Truth Social. The dollar weakened initially before regaining strength amid the news shift. The euro’s rebound could be short-lived if Trump issues a similar denial regarding the Bloomberg report.
“Mr Trump’s first day – Jan 20 – will likely set the tone for his administration and the USD. However, at this stage, the pullback is a corrective move in an overall uptrend,” said Michael McCarthy, a market strategist and Chief Commercial Officer at Moomoo Australia.
Market fundamentals continue to favour the US dollar, supported by a resilient US economy, the Federal Reserve’s tightening cycle, and ongoing economic and political challenges in the Eurozone. Many analysts anticipate the euro could reach parity with the dollar or even dip below that level this year.
Spotlight on the US CPI
All eyes are now on the US CPI data, which will provide crucial insights into the Federal Reserve’s potential monetary policy direction. With consumer prices rising for two consecutive months through November, another strong inflation reading could undermine the euro’s rebound.
Last Friday’s robust job data may support strong consumer spending and keep inflation elevated. Consensus suggests that the headline CPI may have increased by 0.2% month-on-month and 2.9% year-on-year for December, compared with November’s 2.7% annual growth. The core CPI, which excludes volatile food and energy prices, is forecast to rise by 0.3% monthly and 3.3% annually, matching the data from the previous month.
On a positive note, the US producer price index (PPI), which is a price indicator for wholesales, rose less than expected in December. The index increased 0.2% month on month, compared with the estimated 0.4%.
This deceleration was attributed to lower petrol prices, although the recent price surge in crude oil and natural gas could complicate the global inflation outlook.
According to the CME FedWatch Tool, markets have priced in a 97% probability that the Federal Reserve will hold interest rates steady at its next meeting on 29 January.
Meanwhile, the European Central Bank (ECB) is scheduled to hold its policy meeting on 30 January, when the bank is expected to further cut the interest rate by 25 basis points.