The US CPI data for January, released last Friday, fell short of market expectations. The overall CPI rose 0.2% month-on-month, lower than the expected 0.3%; the core CPI (excluding food and energy) rose 0.3% month-on-month, in line with market expectations. Year-on-year data for both CPI and core CPI declined, with the overall and core CPI falling to 2.4% and 2.5% respectively, hitting a four-year low.

Detailed data shows insufficient upward momentum for inflation: energy and used car prices fell by 1.5% and 1.8% month-on-month, respectively, while housing costs rose only slightly by 0.2%. The only disruptive factor was a significant 6.5% month-on-month increase in airfares; excluding this item, inflationary pressures are extremely mild.

Prices of core commodities saw zero month-on-month growth, tariff costs were absorbed internally by enterprises and not passed on to end consumers, resulting in limited lagged inflationary pressure.

The accelerated internationalization of the euro strengthens the medium-term bullish logic.

The euro has received policy support as the European Central Bank announced its euro internationalization policy over the weekend. Starting from the third quarter of this year, the euro repurchase facility will be fully open to global monetary authorities, aligning with the Federal Reserve's liquidity support framework and significantly expanding the international use cases of the euro.

Although ECB President Christine Lagarde stated that internationalization does not directly correspond to a stronger exchange rate, the accelerated internationalization of the euro will drive cross-border capital reallocation from the US to Europe against the backdrop of weakening dollar credibility, directly strengthening the medium-term bullish trend of the euro against the dollar.

Short-term Eurozone economic data is expected to improve, but it is unlikely to trigger a trend-driven market. The market is expected to remain stable. However, if Eurozone bonds receive more support, it may cause European government bond yields to fall, widening the interest rate differential with the US, and ultimately leading to a return of euros to the US.

Expectations of interest rate cuts are rising and the Fed's policy shift path is becoming clearer.

The core PCE deflator, the Fed's anchor for core inflation, is expected to rise 0.2% month-over-month next Friday, outperforming the market. Driven by moderate inflation data, market trading logic has quickly shifted to a dovish stance, with current pricing in a 63 basis point rate cut by the Fed.

Currently, most institutions maintain their baseline judgment that the Federal Reserve will cut interest rates once in June and once in September. Coupled with a cooling job market and continued weakening inflation, this further increases the probability of multiple rounds of interest rate cuts by the Federal Reserve, and a monetary policy easing cycle is approaching.

The weakness of the US dollar is unlikely to change, and short-term recovery lacks momentum.

In the foreign exchange market, the US dollar is unlikely to see a strong rebound in the short term. The strength of the US macroeconomic recovery in the past two weeks has failed to push the dollar back to its early January highs, and the "short selling of US assets" trend in mid-January has exerted long-term downward pressure on the dollar.

Even with strong non-farm payroll data and a repricing of hawkish expectations, the dollar only saw a brief, weak rebound, and market confidence has not yet been restored.

This week's core PCE, Q4 GDP, and FOMC meeting minutes may slightly revise dovish pricing, but stock market volatility has become the dominant variable in the foreign exchange market. Nvidia's earnings report will trigger volatility in technology stocks and transmit to the foreign exchange market.

The safe-haven appeal of the US dollar has weakened significantly. Although there may be a chance for a corrective upward movement this week, there are insufficient conditions for a trend-based rebound. Coupled with the US market being closed and trading being light, short-term volatility will tend to converge.

Summary and Technical Analysis:

Moderate inflation in the United States paves the way for the Federal Reserve to cut interest rates, continuing to suppress the dollar's performance.

The recent appreciation of the euro is not conducive to exports, but it is a good opportunity to promote the internationalization strategy and provide medium- to long-term upward momentum for the exchange rate. However, in the short term, the Eurozone's release of European debt relief policies may push up Eurozone government bond prices and narrow the interest rate differential between Europe and the United States, putting pressure on the euro to correct in the near term. The short-term trend will focus on US macroeconomic data and fluctuations in global risk sentiment.

From a technical perspective, the euro/dollar pair is moving within a descending channel. 1.1857 is a key level in the near term. If it fails to hold, the exchange rate may consolidate towards the lower channel line around 1.1800.


(Euro/USD daily chart, source: FX678)

At 21:24 Beijing time, the euro was trading at 1.1850/51 against the US dollar.