EUR/USD bounces back strongly after sticky US inflation data

• EUR/USD remains vulnerable amid uncertainty over a potential trade war between the Eurozone and the US.
• ECB’s Rehn sees the Deposit Facility rate heading to the neutral rate in the first half of 2025.
• The US inflation data remained sticky in October on a monthly as well as annual basis.

EUR/USD rebounds sharply to near 1.0650 during the New York session on Wednesday after touching a fresh year-to-date (YTD) low of 1.0592. The major currency pair rebounds strongly as the United States (US) Consumer Price Index (CPI) data remained sticky in October. The CPI report showed that the annual headline inflation accelerated to 2.6% from 2.4% in September, as expected. The core CPI – which excludes volatile food and energy prices – rose in line with estimates and the former release of 3.3%. Monthly headline and core inflation rose at a steady pace of 0.2% and 0.3%, respectively, as expected.

Sticky inflation data might diminish market expectations for the Federal Reserve’s (Fed) interest rate cuts in December. The Fed is expected to cut interest rates again by 25 basis points (bps) to 4.25%-4.50% next month, according to the CME FedWatch tool. However, the likelihood has increased to 80% from 60% on Tuesday. Market expectations for a Fed interest rate cut in December have increased as investors expect the impact of President-elect Donald Trump’s policies on the United States (US) economic outlook and price pressures won't be immediate.

Trump vowed to raise import tariffs by 10% and lower corporate taxes in his election campaign. This move will increase demand for domestic goods and boost labor demand and business investment, eventually prompting inflationary pressures and forcing the Fed to follow a more gradual rate-cut cycle.

On Tuesday, Minneapolis Federal Reserve Bank President Neel Kashkari cautioned at a Yahoo! Finance event, "If inflation surprises to the upside before December, that might give us pause.” Kashkari added that the monetary policy is "modestly restrictive right now," and expects economic growth to persist.

Daily digest market movers: EUR/USD remains broadly weak on Trump trade worries

• Euro’s (EUR) underperformance across the board is expected to keep the major currency pair on the back foot. The Euro is downbeat due to multiple headwinds, such as a potential trade war between the Eurozone and the US and the collapse of the German three-party government.
• On Tuesday, European Central Bank (ECB) Governing Council Member and Bank of Finland Governor Olli Rehn suggested that Europe should position itself better ahead of Trump’s second term. "If a trade war were to start, Europe must not be unprepared,” Rehn said. A trade war between both sides of the Atlantic looks likely, as Trump mentioned in his election campaign that the euro bloc will "pay a big price" for not buying enough American exports. 
• When asked about his views on the ECB interest rate outlook, Rehn commented that the Deposit Rate could decline to the so-called neutral rate in the first half of 2025, Reuters reported. According to the ECB staff, the neutral rate is around 2% or 2.25%.
• Meanwhile, the collapse of the German three-party coalition after Chancellor Olaf Scholz sacked Finance Minister Christian Linder last week has also been a major cause of weakness in the Euro. According to a Focus Online report, German Olaf will call a confidence vote on December 18 and the snap election on February 23.
• Going forward, investors will focus on ECB President Christine Lagarde’s speech for fresh interest rate guidance, which is scheduled for Thursday.

Technical Analysis: EUR/USD aims for firm footing above 1.0600

EUR/USD hovers near the fresh year-to-date low around 1.0600 in European trading hours on Wednesday. The major currency pair is expected to face more downside, with the 20-day Exponential Moving Average (EMA) turning vertically south near 1.0800.

The return of the 14-day Relative Strength Index (RSI) in the range of 20.00-40.00 indicates bearish momentum gaining traction and adds to evidence of more downside.

Looking down, the pair could decline to near the psychological support of 1.0500 after breaking below 1.0600. On the flip side, the round-level resistance of 1.0700 will be the key barrier for the Euro bulls.

(The story was corrected at 10:30 GMT to say in the first bullet of daily digest market movers that "The Euro is downbeat due to multiple headwinds not tailwinds")