German CPI confirmed at 2.0%, euro drifting, FOMC split over cuts

[Ben Graham]

The euro continues to have a quiet week and is drifting for a third consecutive day. In the European session, EUR/USD is trading at 1.1730, up 0.09% on the day.

German inflation dips to 2% as food, energy prices fall

German inflation rose 2.0% y/y in June, in line with the consensus and a drop lower than the 2.1% gain recorded in the past two months. The drop in CPI was driven by declines in energy and food prices. However, service prices remain high and continue to fuel inflation. Monthly, inflation was flat, in line with the consensus and a touch lower than the 0.1% gain in May.

The annual inflation rate of 2.0% is the lowest level since October 2024. The inflation rate is right at the ECB's target but Bank policymakers know that the tough battle against inflation isn't over.

Services inflation has been persistently above the 2% target and the newest headache for the ECB is the rapid appreciation of the euro, which has skyrocketed some 14% against the US dollar this year. The euro's rise has kept a lid on import prices and dampened inflation, but if the euro continues to rise, it will hurt the struggling export sector.

The ECB lowered the deposit rate in June by a quarter-point to 2.0%, its lowest level since October 2022. If next week's eurozone inflation report indicates that inflation is heading lower, expectations will rise for a rate cut at the July 24 meeting.

FOMC minutes: members split over much to cut

The FOMC minutes from the June meeting were dovish in the sense that there is a broad consensus that the Fed will deliver additional rate cuts this year. The pace of those cuts, however, is up for debate. The minutes noted that some members favored cutting as soon as the July meeting, while others were more cautious and wanted to see where inflation and employment were headed. President Trump's tariffs have not boosted inflation so far, but the tariff effect on inflation could be felt in the following months.

EURUSD Technical

• EUR/USD has pushed above resistance at 1.1721 and is testing resistance at 1.1733. Above, there is resistance at 1.1739
• 1.1715 and 1.1703 are the next support levels

EURUSD 4-Hour Chart, July 9, 2025

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