EUR/USD drops to 1.0820 on soft German Inflation, US core PCE in focus

• EUR/USD drops sharply on the slower-than-projected rise in German core inflation.
• Easing price pressure in the Eurozone would allow ECB policymakers to consider rate cuts sooner.
• The US core PCE Price Index data will guide the US Dollar.

The EUR/USD pair falls sharply to 1.0820 as the preliminary German Harmonized Index of Consumer Prices (HICP) remains soft in February. The annual headline inflation grew by 2.7% as expected, slower than January’s reading of 3.1%. Also, the monthly headline HICP matches expectations at 0.6%. In January, the German economy deflated by 0.2%.

The annual core inflation that excludes volatile food and oil prices, closely tracked by European Central Bank (ECB) policymakers, rose at a moderate pace of 2.5%, against an expectation of 2.6% and the prior reading of 2.9%.

Significant progress in inflation returning to the 2% target would allow ECB policymakers to consider a change in the monetary policy stance early. Earlier, ECB President Christine Lagarde said rate cuts are expected in summer.

Besides a slower growth in Germany’s inflation data, caution among market participants ahead of the United States core Personal Consumption Expenditure Price Index (PCE) for January has also weighed on the Euro.

The US core PCE Price Index data is expected to have risen by 0.4% on a month-on-month basis against a 0.2% increase in December. Investors anticipate that the underlying inflation data have decelerated to 2.8% annually against the former reading of 2.9%. Sticky price pressures would force traders to dial back expectations of rate cuts in the June monetary policy meeting.

Meanwhile, the US Dollar Index (DXY), which gauges the value of Greenback against six major currencies, rebounds sharply to 104.00.