Euro extends recovery above 1.04 as focus shifts to Eurozone inflation data

• The Euro bounces higher against the US Dollar for a third straight day in a row on Tuesday. 
• A surprise uptick in German inflation and a bounce in the European Services PMIs are supporting the Euro. 
• Meanwhile, markets are on edge over the rumors and pushbacks on President-elect Donald Trump's tariff schemes. 

The Euro is receiving more support on Tuesday and extends its recovery against the US Dollar (USD) for the third day in a row, with expectations that the upcoming inflation numbers for the Eurozone as a whole will remain persistent. The expectations were revised after the preliminary German Harmonized Index of Consumer Prices (HICP) data for December, released on Monday, showed that the monthly headline HIPC inflation jumped by 0.7%, above the 0.5% estimate. On a yearly basis, headline HICP rose by 2.9%, compared to 2.4% in November.

Meanwhile, markets are on edge over the whipsaw reactions and knee-jerk moves over the tariff plans from President-elect Donald Trump's tariff plans. The Washington Post published a piece mentioning that Trump was considering simplifying his tariff schemes by imposing a single universal tariff on critical imports and goods. Hours later, Trump himself came out to refute the rumors and confirm that the schemes and plans would remain in place as earlier announced. 

Daily digest market movers: French HICP upbeat confirmed 

• The French preliminary HICP for December has already been released earlier on Tuesday. The monthly gauge snapped the previous disinflationary print by jumping 0.2%, below the 0.4% expectation and above the -0.1% from November. The yearly gauge came in at 1.8%, which is 0.1% higher than the 1.7% from November. 
• At 10:00 GMT, the preliminary Eurozone HICP for December will be released. 
  • The monthly headline HICP has no consensus view, while it was at -0.3% in November. 
  • The yearly headline HICP is expected to tick up to 2.4% from 2.2% in the previous month.
  • The monthly core HICP has no forecast and was at -0.6% in November.
  • The yearly core HICP is expected to remain unchanged at 2.7%.
  • For now, the European Central Bank (ECB) is projected to cut its policy rate by 25 basis points on January 30. 
• Italian inflation will also be released at 10:00 GMT. Here, a similar pattern is seen as in Germany, with the preliminary December monthly HICP heading to 0.3% from -0.1%.
• German Bunds ticked up quite a bit last week and stretched up to 2.47% on Monday. This Tuesday, rates are starting to ease, with the Bund currently trading around 2.44%.
• European equities are unhappy with the recent development in European inflation numbers and are dipping lower this Tuesday. The fear that inflation will pick up again could mean that the European Central Bank keeps rates steady for longer or considers starting to hike again, which is a setback for equities. 

Technical Analysis: EUR/USD above ground at 1.04 with blurry outlook

EUR/USD is in a perfect technical bounce, though where to go next is becoming blurry. The geopolitical developments from Monday have helped the Euro find support at 1.0294 and rally all the way to nearly 1.0448. The question now will be whether the Euro has enough room left to head above 1.0450. This will not be the case if those European bonds start to fade from their Monday high points and need more upside to pull the Euro further up towards 1.05.

The first big level to break is 1.0448, the low of October 3, 2023. Once through that level, the 55-day Simple Moving Average (SMA) at 1.0558 comes into play. Another catalyst will be needed for this kind of move, as it could squeeze the Dollar bulls. 

On the downside, ahead of the current two-year low at 1.0224, the 1.0294 level is now acting as the new first line of defence. It was a pivotal point on Monday, offering room for buyers in EUR/USD to get involved and push price action higher. Further down, the round level at 1.02 would mean a fresh two-year low. Breaking below that level would open up the room to head to parity, with 1.0100 as the last man standing before that magical 1.00 level. 

EUR/USD: Daily Chart