EURUSD: All eyes on US CPI and EU rate decision

• EUR/USD near $1.05, close to two-year lows
   
• ECB expected to cut rates by 25 basis points
   
• US CPI data in focus
   
• Economic fragility and political risks persist
   
• ECB highlights downside risks to Eurozone growth

The euro lingered close to $1.05, staying just above the two-year lows recorded in late November, as markets anticipate the European Central Bank's (ECB) upcoming monetary policy decision.

The ECB is largely expected to reduce the key deposit rate by 25 basis points for the fourth consecutive time, lowering it to 3% on Thursday.
 

A faster pace of monetary easing could occur, with potential quarter-point rate cuts at each meeting until June, which might lower the deposit rate to 2%.

Economic indicators across the Eurozone highlight persistent fragility, exacerbated by political instability in France and Germany, as well as global uncertainties tied to Donald Trump’s future presidency.

Further weighing on sentiment, ECB President Christine Lagarde, speaking during a parliamentary session, cautioned about a possible deceleration in Eurozone growth in the coming months.

She underlined that risks to the economic outlook are skewed to the downside over the medium term.

These factors, combined with geopolitical tensions and economic vulnerabilities, have contributed to subdued confidence among traders and investors, keeping the euro under pressure.

Also in focus…

The markets are now concentrating on the upcoming US CPI release, due this afternoon.

• Core inflation MoM: 0.3% – expected
   
• Core inflation YoY: 3.3% – expected
   
• Inflation MoM: 0.3% – expected
   
• Inflation YoY: 2.7% – expected

This economic reading may shed light on Fed’s policy trajectory in the foreseeable future.

At the time of writing, the implied probability of 25 bps cut was at 86.1%. The next FOMC meeting is scheduled to take place in 7 days. (Source: CME FedWatch Tool).
 

A higher-than-expected inflation may contribute to the Fed’s potential decision to hold rates intact during the January meeting.