The Eurozone’s flash Harmonized Index of Consumer Prices (HICP) rose by 2% annually in December, slightly down from November’s 2.1%. Monthly inflation increased by 0.2% after falling by 0.3% the month before. Core HICP, which excludes food, energy, alcohol, and tobacco, grew at a slower annual rate of 2.3%, down from 2.4% last month. In December, core HICP went up by 0.3% compared to the previous month.

Exchange Rate Movements

After the data release, the EUR/USD exchange rate climbed to nearly 1.1690. The Euro gained strength against major currencies, especially the Canadian Dollar. Eurostat will later release the initial Eurozone HICP data for December. It is expected that annual Eurozone HICP inflation will drop to 2.0% from November’s 2.1%. Core inflation is predicted to remain at 2.4%. If the Eurozone’s HICP data is stronger than expected, it could influence the EUR/USD pair. However, the pair is still subdued, affected by a 1.1% annual rise in Germany’s November Retail Sales, along with a 0.6% monthly decline. The US Dollar’s recovery continues to influence the EUR/USD pair, which is trading around 1.1680. Technical indicators suggest a potential bearish trend, as the pair is below the 50-day EMA, hinting at possible further downward pressure.

Economic Indicators and Market Implications

The December inflation data shows a cooling price trend in the Eurozone, with the headline rate now at the European Central Bank’s (ECB) target. Core inflation, which the ECB closely monitors, has decreased to 2.3%. This release reduces the need for the central bank to consider a more aggressive approach in the first quarter. This data supports the recent cautious statements from ECB officials, who have adopted a “wait-and-see” strategy. Unlike the aggressive tightening seen in 2023, the central bank appears comfortable keeping rates steady after a minor adjustment in late 2025. Currently, the Eurozone’s unemployment rate stands at 6.5%, which provides little urgency for swift action. On the other hand, the US economy looks stronger, with the ISM Services PMI for December coming in at a solid 53.8. This highlights the policy divergence between a cautious ECB and a Federal Reserve that may maintain higher rates for a longer time. This fundamental difference is a key factor for the Euro in the coming weeks. For derivatives traders, this situation strengthens the case for bearish positions on the EUR/USD. The pair’s technical weakness below the 50-day moving average, combined with the broader economic context, is significant. Implied volatility on three-month EUR/USD options is decreasing to 6.4%, indicating that the market does not expect any sharp upside surprises. As a result, strategies that benefit from a declining or stable EUR/USD are recommended. Buying put options or creating bear put spreads aiming for the December 2025 low of 1.1589 is appealing. Another strategy is selling out-of-the-money calls above the 1.1800 resistance level to take advantage of limited upside potential. Regarding interest rate derivatives, this inflation report is likely to temper expectations for an ECB rate hike in the first half of the year. Earlier, the market anticipated a more aggressive approach. Now, positioning for a flatter Eurozone yield curve or receiving fixed rates on interest rate swaps might be effective. Create your live VT Markets account and start trading now.

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