The euro weakened against the US dollar on Tuesday as fresh inflation figures from Europe reinforced expectations that price pressures across the euro area are easing faster than anticipated, complicating the European Central Bank’s future policy path.
The EUR/USD pair slipped to around $1.17, extending recent losses as investors recalibrated interest rate expectations for 2026 and beyond. The pullback came amid broader strength in the US dollar, which regained ground against major peers as markets reassessed the likelihood of Federal Reserve rate cuts.
Data from the foreign exchange market showed the US Dollar Index (DXY) trending higher, climbing toward the 98.5 level and edging closer to the psychologically significant 100-point mark. The index measures the greenback’s performance against a basket of major currencies.
European inflation data provided the immediate catalyst for the euro’s retreat. Germany’s consumer price inflation slowed to 1.8 percent in December, undershooting market forecasts of 2 percent and falling below the ECB’s target for the first time since September 2024. The moderation was driven largely by softer food prices and a sharper decline in energy costs.
Across the wider euro area, the harmonised consumer price index rose by 2 percent, the weakest reading since July and below expectations of 2.2 percent. France also reported softer inflation outcomes, with its national CPI rising just 0.8 percent and the harmonised measure coming in at 0.7 percent.
As a result, money market pricing now reflects near-zero probability of an ECB rate hike by December 2026, with only a 24 percent chance priced in for March 2027. Investors are now focused on the full Eurozone inflation report due Wednesday, which could further shape rate expectations.
Meanwhile, sentiment around the US dollar improved on signs that the Federal Reserve may hold a neutral stance longer than previously anticipated. Markets currently expect the Fed to leave interest rates unchanged at its January 28 and March 18 policy meetings, as inflation remains sticky and labour market conditions resilient.
Over the last five trading sessions, EUR/USD has maintained a clear bearish bias, declining by nearly 1 percent. FX analysts say diverging central bank expectations between the ECB and the Federal Reserve remain a key driver of the currency pair’s weakness.
Upcoming US employment data later this week could provide additional clarity on the Fed’s next steps. Should rate cuts fail to materialise in the near term, analysts warn that the dollar could continue to recover, placing further downward pressure on the euro in the sessions ahead.
