EUR/USD: Confirmed slowdown of eurozone inflation

Following the trend in crude oil prices, a rebalancing was taking place in the Euro/Dollar currency pair, trading near $1.1815 per euro. This occurred on the eve of the first ECB Governing Council meeting of 2026. Barring any major surprises, the European Central Bank is expected to leave the interest rate on the single currency unchanged at 2.15% for the main refinancing operations that provide the bulk of liquidity to the banking system. The deposit facility rate (DFR) will also remain the same at 2%.

"While we do not expect any changes at this month's meeting, the risk of lower-than-expected inflation at the start of the year reinforces our belief that the ECB could cut rates again to 1.75% later this year," say the experts at Indosuez WM, who elaborate on the specific case of Germany, the Eurozone's largest economy:

In Germany, several conflicting forces are at play at the start of this year. On the positive side, the increase in the minimum wage in January 2026 could exert some upward pressure. However, this impact should be mitigated by the still relatively weak macroeconomic environment and the slowing labour market. Furthermore, the reduction in VAT for German restaurants introduces a downside risk to services inflation, thus reinforcing the short-term disinflationary momentum. Finally, although a single data point does not constitute a trend, we believe that the latest figures already reflect the initial effects of increased competition from the Chinese exports of goods - an influence that the ECB continues to underestimate.

On the dollar side, the relative thaw in diplomatic relations between Washington and Tehran is working in favour of the greenback in the short term. Currency traders are also still digesting the name of the person who will succeed John Powell as head of the Fed, pending confirmation by Congress: Kevin Warsh. And they are still considering the impact of this nomination - even if it must be formally approved by lawmakers - on the trajectory of federal interest rates.

"This appointment comes as the central bank enters the final phase of a battle waged for several years to stabilise prices without jeopardizing the overall economy. While markets had been harbouring strong expectations for several weeks, the nomination of Kevin Warsh immediately raises questions about the central bank's independence and its future approach to inflation, which has remained stubbornly around 3%. In the past, Warsh has called for a 'regime change' at the Fed, criticizing both its excessive reliance on data and the 'bloated' size of its balance sheet," notes Dan Murphy, a professor at the Darden School of Business at the University of Virginia.

On the statistical front, currency traders have just learned that consumer prices, adjusted for volatile items, rose by 2.2% year-on-year, below the consensus forecast of 2.2%. This reinforces the ECB's wait-and-see approach, while reassuring economic actors.

Right now, the EUR/USD is trading at $1.1817.

KEY TECHNICAL ELEMENTS
The triangle consolidation pattern of 28 and 29 January has been invalidated, and our long positions on the EUR/USD have been suspended. Our outlook is neutral pending further clear technical signals.

MEDIUM-TERM FORECAST
Based on the key technical factors mentioned above, our medium-term outlook for the EUR/USD is neutral.

We will maintain this neutral opinion as long as the EUR/USD is positioned between the support at $1.1608 and the resistance at $1.2214.