Euro Declines Amid Inflation Data and Political Uncertainty

The euro fell against the dollar due to inflation data from Germany and Spain, leading to speculation about the European Central Bank's interest rate policies. Declines in inflation in key German states suggest a national decrease, and the upcoming U.S. PCE index release will be crucial. Political developments in Germany's eastern states may impact the euro further.

The euro dipped against the dollar following inflation metrics from Germany and Spain, prompting investors to speculate on a forthcoming interest rate easing cycle by the European Central Bank (ECB). Six major German states recorded a drop in inflation, hinting at a significant national decline this month. Spain also experienced its slowest inflation pace in a year.

The euro plunged 0.2% to $1.1098, with a previous low at $1.1072, after trading at $1.1128 ahead of the German figures. It recently reached a 13-month peak at $1.1201. Money markets have now priced in 67 basis points of ECB rate cuts for 2024, up from 63 basis points before the data release.

Looking ahead, investors turn their attention to the upcoming U.S. core personal consumption expenditures (PCE) price index release on Friday, the Federal Reserve's preferred inflation measure. The euro remains under scrutiny ahead of elections in Germany's eastern states, where two parties—one far-right and one far-left—are polling significantly.

(With inputs from agencies.)