FX.co ★ Euro Retreats on European Inflation Data

The euro relinquished its initial gains and is currently trading at $1.17 following the release of European inflation data, which indicated a softening in price pressures. This development has tempered expectations of an interest rate increase by the European Central Bank (ECB) by the year's end. In Germany, inflation decreased to 1.8% in December, falling below the predicted 2% and the ECB's 2% target for the first time since September 2024. This decline was attributed to lower food prices and a more significant reduction in energy costs. The EU-harmonized Consumer Price Index (CPI) also increased by only 2%, marking the lowest rate since July and under the anticipated 2.2%. Similarly, in France, inflation figures did not meet expectations, with the national CPI rising by just 0.8% and the harmonized rate at 0.7%. Money markets now consider the likelihood of an ECB rate hike by December 2026 as almost negligible, with only about a 24% chance by March 2027. Investors are shifting their focus to the comprehensive Eurozone inflation results expected on Wednesday, following the ECB's indication last month that interest rates are likely to remain unchanged due to stable growth and inflation close to the target.