Euro holds above 1.1500 as cooling US inflation weighs on dollar

The euro traded above the 1.1500 level against the US dollar on Thursday, as cooler-than-expected US inflation data reduced the appeal of the greenback and reinforced market expectations that the Federal Reserve may slow its pace of interest rate hikes.

Why the dollar weakened

The latest US consumer price index (CPI) report, released on Wednesday, showed a year-on-year inflation rate of 6.5% for December, down from 7.1% in November and marking the sixth consecutive month of slowing price growth. On a monthly basis, prices actually fell by 0.1%, the first decline since May 2020. The data suggests that the Fed’s aggressive tightening campaign is beginning to cool price pressures, prompting traders to scale back bets on further rate increases.

According to CME Group’s FedWatch tool, markets now price in a 25-basis-point hike at the Fed’s February meeting, with a growing possibility that the central bank may pause after that. This shift in expectations has weighed on US Treasury yields, making dollar-denominated assets less attractive to yield-seeking investors.

Euro supported by ECB hawkishness

On the other side of the Atlantic, the euro has found support from a more hawkish European Central Bank (ECB). ECB President Christine Lagarde and several policymakers have repeatedly signaled that interest rates will continue to rise at a steady pace in the coming months to combat inflation that remains well above the bank’s 2% target. In December, the ECB raised its deposit rate by 50 basis points to 2%, and markets expect another 50-basis-point hike in February.

The contrast in monetary policy outlooks—with the Fed likely nearing the end of its tightening cycle while the ECB is still in the early stages—has narrowed the interest rate differential between the US and the euro area, providing a tailwind for the single currency.

What this means for traders and businesses

For currency traders, the key question now is whether the euro can sustain its gains above the psychological 1.1500 level. Technical analysts note that the pair has been in a range between roughly 1.0500 and 1.1500 for most of the past year, and a clear break above the upper bound could signal further upside. However, resistance may be strong, as the pair has not closed above 1.1500 since May 2022.

For European businesses that rely on imports priced in dollars, a stronger euro reduces costs, potentially easing some of the inflationary pressures from energy and raw materials. Conversely, US exporters to Europe may find their goods less competitive as the dollar weakens.

Market reaction and outlook

As of the time of writing, EUR/USD was trading around 1.1520, up about 0.4% on the day. The pair’s gains were modest but steady, reflecting cautious optimism among investors. The euro’s strength was also visible against other major currencies, with the euro index rising to its highest level since April 2022.

Looking ahead, the focus will shift to the ECB’s monetary policy meeting on February 2, where the bank is widely expected to deliver another rate hike. On the US side, the next Federal Reserve meeting is scheduled for January 31-February 1, with markets almost fully pricing in a 25-basis-point move. Any surprises in economic data or central bank commentary could quickly alter the currency landscape.

Conclusion

The euro’s ability to hold above 1.1500 reflects a convergence of factors: cooling US inflation, a more dovish Fed outlook, and a still-hawkish ECB. While the near-term technical picture appears supportive for the euro, sustained gains will depend on whether the Fed indeed slows its tightening and whether the eurozone economy can withstand further rate increases. Traders and businesses should monitor upcoming central bank meetings and inflation data for clearer direction.

FAQs

Q1: Why did the euro rise above 1.1500?
The euro rose above 1.1500 as cooler US inflation data reduced expectations of aggressive Fed rate hikes, weakening the dollar. Additionally, the ECB’s hawkish stance on further rate increases supported the euro.

Q2: What is the significance of the 1.1500 level?
The 1.1500 level is a psychological and technical resistance point for EUR/USD. A sustained break above it could signal further upside, while failure to hold could lead to a retest of lower support levels.

Q3: How might this affect businesses?
A stronger euro lowers import costs for European businesses and reduces inflationary pressures. For US exporters, a weaker dollar makes their goods more expensive for European buyers, potentially affecting sales volumes.