German inflation data for December showed a significant downside surprise, with the Core Consumer Price Index (CPI) year-on-year dropping to 2.4%, down from 2.7% in November. The Harmonised Index of Consumer Prices (HICP) rose by 2.0% year-on-year, below the expected 2.2%, and down from a prior 2.3%. Similarly, the overall inflation rate decreased from 2.6% previously.

Earlier in the session, inflation readings from various German states had already hinted at softer national CPI figures, which helped temper market reaction to the official data release.

From a monetary policy perspective, the data is unlikely to influence the European Central Bank’s (ECB) stance. The ECB is currently in a neutral position and has repeatedly emphasised that it will not react to minor or short-term fluctuations around its 2% inflation target. Market expectations mirror this, pricing in just 2 basis points of tightening from the ECB by the end of the year, indicating no significant policy moves are anticipated.

Looking at technical price action on the 1-hour EUR/USD chart, the currency pair initially bounced following the German CPI data, reflecting a typical “buy the rumour, sell the fact” scenario. Price movements have remained confined between a support zone near 1.1660 and a downward trendline.

Sellers are expected to continue applying pressure around the trendline, keeping risk defined above it, aiming for further lows. Conversely, buyers would need a clear break above this trendline to open the possibility of a rally toward the 1.18 level.

Original Source: Giuseppe Dellamotta of investinglive.com