EUR/USD consolidates as US inflation data reinforce cautious Fed outlook

• EUR/USD holds firm as markets digest broadly in-line US inflation data.
• Headline CPI matched expectations, while core inflation softened modestly.
• Traders remain cautious as markets price gradual Fed easing later this year.

The Euro (EUR) holds firm against the US Dollar (USD) on Tuesday as traders show a limited reaction to the latest US inflation data. At the time of writing, EUR/USD trades around 1.1667, as the Greenback softens modestly.

According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 0.3% MoM in December, in line with expectations and unchanged from November. Headline inflation was steady at 2.7% YoY.

However, core inflation softened modestly. The core CPI, which excludes volatile food and energy components, rose 0.2% MoM in December, below the 0.3% market forecast and matching the previous month’s increase. On a yearly basis, core inflation held at 2.6%, undershooting expectations of 2.7% and unchanged from November.

The broadly in-line headline figures and softer-than-expected core inflation suggest upside risks to inflation are not materialising, even as the disinflation process remains gradual, keeping the Federal Reserve (Fed) on a cautious easing path.

Markets are currently pricing in around two rate cuts this year, although investors widely expect the Fed to keep interest rates unchanged through the first quarter. Mixed US labour-market data released last week supported that view, with the Unemployment Rate ticking lower even as headline Nonfarm Payrolls (NFP) came in softer than expected.

Looking ahead, attention turns to speeches from St. Louis Fed President Alberto Musalem and Richmond Fed President Tom Barkin later on Tuesday for further clues on the policy outlook.