Eurozone inflation exceeded forecasts in January, reaching 2.5%, however the euro weakened as fears of US tariffs overshadowed expectations of a hawkish ECB response. European shares tumbled, with auto shares hit hardest, whereas bond yields fell as buyers sought security.
Eurozone inflation rose greater than anticipated in January, including to financial uncertainty as investor sentiment remained pressured by the looming risk of US tariffs on Europe.
Annual inflation within the euro space rose to 2.5% in January 2025, up from 2.4% in December, in accordance with a flash estimate from Eurostat. The studying exceeded economist forecasts, which had anticipated inflation to stay unchanged at 2.4%, marking the best degree since July 2024.
Core inflation, which excludes risky vitality and meals costs, remained secure at 2.7%, defying expectations of a slight decline to 2.6%.
Among the many key parts of inflation, providers recorded the best annual price at 3.9%, although barely decrease than the 4.0% recorded in December. The price of meals, alcohol and tobacco elevated by 2.3%, a slowdown from the two.6% seen the earlier month.
Vitality costs, nevertheless, surged to 1.8%, rebounding sharply from the 0.1% recorded in December, whereas inflation for non-energy industrial items remained regular at 0.5%.
Amongst eurozone member states, Croatia posted the best annual inflation price at 5.0%, adopted by Belgium at 4.4% and Slovakia at 4.1%. Eire, Finland and Italy recorded the bottom inflation charges at 1.5%, 1.6% and 1.7%, respectively.
On a month-to-month foundation, Slovakia and Lithuania skilled the sharpest worth will increase, each rising by 1.6%.
Market response: euro underneath strain amid commerce tensions
Regardless of the stronger-than-expected inflation information, the euro struggled to realize traction and remained underneath strain as a consequence of rising considerations over US commerce coverage. The foreign money briefly discovered help at 1.0230 in opposition to the US greenback however was nonetheless down 1.2% on the day. Earlier in January, it had fallen to 1.0175, its lowest degree since November 2022.
The US greenback strengthened broadly, rising 0.7% in opposition to the British pound. The Canadian greenback weakened by greater than 1%, whereas the Mexican peso dropped 2.1% as merchants reacted to commerce tensions.
The foreign money market volatility got here after US President Donald Trump reiterated threats to impose tariffs on the European Union. The administration had already enacted tariffs of 25% on Canadian and Mexican items and 10% on Chinese language imports, with Trump warning that Europe could possibly be subsequent.
Though he didn’t specify a timeline, he acknowledged that new tariffs can be carried out “fairly quickly”.
Analysts urged that markets had not but totally priced within the danger of escalating commerce tensions. BBVA’s Alejandro Cuadrado famous that tariffs would seemingly stay a dominant market theme within the coming months.
“Tariffs will proceed to dominate the markets, and a few merchants nonetheless consider they could possibly be reversed. The complete affect might not but be priced into FX markets”, he wrote on Monday.
ING’s Francesco Pesole warned that the prospect of a worldwide commerce warfare, with tariffs extending to the EU, represented a transparent draw back danger for the euro.
He added that “the potential for a serious US commerce report in April might hold buyers in a sell-the-rally mindset for EUR/USD”.
Luca Cigognini, a market strategist at Intesa Sanpaolo, highlighted 1.0180 as a key technical help degree for the euro, warning that, if breached, the foreign money might fall in direction of 1.0120.
European shares stoop, auto sector hit hardest
European fairness markets fell sharply as commerce considerations overshadowed inflation information. The Euro STOXX 50 dropped 1.9%, whereas Germany’s DAX index slid 2%.
The automobile sector confronted the steepest losses, as fears of US tariffs on European automobiles rattled buyers. Volkswagen shares fell by greater than 6%, Mercedes-Benz declined 4.9%, and BMW misplaced 4.5%. In Milan buying and selling, Stellantis dropped over 7%, whereas tyre producer Pirelli noticed its inventory fall by 5.5%.
The uncertainty surrounding commerce coverage and its potential financial affect led buyers to hunt refuge in sovereign bonds, pushing yields decrease throughout Europe. German Bund yields fell by eight foundation factors to 2.40%, whereas France’s OAT yields declined by six foundation factors to three.15%.