Eurozone Inflation Rises to 2.5% in January Amid Energy Cost Surge
The euro area’s annual inflation rate increased to 2.5% in January 2025, up from 2.4% in December 2024, according to Eurostat’s flash estimate. This unexpected rise was primarily driven by a sharp increase in energy prices, which surged 1.8% year-on-year compared to just 0.1% in December.
Key Inflation Components
Breaking down the inflation components:
- Services Inflation: 3.9% (slightly down from 4.0% in December)
- Food, Alcohol & Tobacco: 2.3% (down from 2.6%)
- Energy: 1.8% (up sharply from 0.1%)
- Non-Energy Industrial Goods: 0.5% (unchanged from December)
Core inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, remained stable at 2.7%, marking no change since September.
Inflation Trends Across the Eurozone
The inflation rate varied significantly across member states:
- Highest inflation rates:
- Croatia: 5.0%
- Belgium: 4.4%
- Slovakia: 4.1%
- Lowest inflation rates:
- Ireland, Italy, and Malta: 1.5%
- Finland: 1.6%
- Major economies:
- Germany: 2.8%
- France: 1.8%
This divergence highlights persistent inflationary pressures in certain regions despite an overall trend toward price stabilization.
ECB’s Monetary Policy Response
In response to evolving inflation trends, the European Central Bank (ECB) cut its key interest rates by 25 basis points on January 30, 2025. The new rates, effective February 5, 2025, are:
- Deposit facility rate: 2.75%
- Main refinancing rate: 2.90%
- Marginal lending facility rate: 3.15%
This marks the fifth consecutive rate cut, reflecting the ECB’s cautious approach to monetary easing while inflation remains above its 2% target.
Eurozone Economic Growth Outlook
- EU GDP Growth (2024): 0.8% y/y
- Eurozone GDP Growth (2024): 0.7% y/y
- Q4 2024 GDP Growth:
- EU: +0.1% q/q, +1.1% y/y
- Eurozone: Flat q/q, +0.9% y/y
Amid sluggish growth, the ECB downgraded its GDP forecasts for the coming years:
- 2024: 0.7% (down from 0.8%)
- 2025: 1.1% (down from 1.3%)
- 2026: 1.4% (down from 1.5%)
Market and Policy Implications
Despite the inflation uptick, economists largely expect the ECB to continue cutting rates gradually throughout 2025. However, the persistence of services inflation at near 4% has led policymakers to prefer a cautious, step-by-step approach to easing.
Potential Inflation Risks: Trade Tariffs
A new source of concern is the potential imposition of tariffs between the U.S. and the EU, which could:
- Increase import costs, adding inflationary pressures
- Lead to retaliatory tariffs from the European Commission, further raising consumer prices
The latest inflation data confirms that the euro area’s disinflation process is progressing, but at a slower pace than anticipated. While the ECB remains on a rate-cutting trajectory, high services inflation and geopolitical risks could complicate policy decisions in the coming months. The path to the 2% inflation target remains uncertain, requiring a careful balancing act between monetary easing and inflation control.
EUR/USD Trading Strategy Based on Current Price Action
Based on the 4H chart analysis, there are two key trading strategies—one bullish and one bearish—depending on how price reacts to the resistance and support levels.
Bullish Trading Strategy (Buy Setup)
Entry:
- Look for a break and retest of the 1.03509 resistance level.
- Confirmation should include:
- Bullish candlestick patterns (e.g., engulfing, pin bar, or rejection wicks).
- Liquidity grab above resistance, then a retest of the previous structure before continuing higher.
Take Profit Targets:
- TP1: 1.03688 (0.618 Fibonacci Level)
- TP2: 1.03912 (0.705 Fibonacci Level)
- TP3: 1.04121 (0.786 Fibonacci Level)
Stop Loss:
- Below 1.03200 (previous swing low).
- Alternatively, place it below the 0.382 Fibonacci retracement at 1.03081 for a safer risk management approach.
Trade Confirmation:
- Strong bullish momentum.
- Retest and rejection at the resistance level.
- Breakout of the Fair Value Gap (FVG) above.
Bearish Trading Strategy (Sell Setup)
Ideal Entry:
- If price fails to break 1.03509, watch for:
- Bearish rejection wicks
- Divergence in momentum indicators (RSI, MACD, or volume analysis)
- A strong bearish engulfing candle below resistance.
- Another selling opportunity:
- If price fills the bearish FVG and gets rejected, look for shorts around 1.03600-1.03800.
Take Profit Targets:
- TP1: 1.03081 (0.382 Fibonacci Level)
- TP2: 1.02500 (Mid-level before Support Zone)
- TP3: 1.01925 (Major Support Level)
Stop Loss:
- Above 1.03650 (above the previous FVG zone to avoid stop hunts).
- Alternatively, above 1.04000 if entering from a higher level near 1.03800.
Trade Confirmation:
- Failure to break resistance (1.03509).
- Bearish FVG rejection.
- Break of minor structure to the downside.
Risk Management & Additional Insights
Risk-Reward Ratio (RRR):
- Ensure at least 1:2 or 1:3 for a strong RRR.
- Adjust position size to maintain risk at 1-2% per trade.
Liquidity Zones to Watch:
- Above 1.03509 – Potential stop hunts before reversal.
- Below 1.01925 – If price breaks this support, it may enter bearish price discovery.
News Events & Volatility Consideration:
- Watch out for major economic releases like US labor Market data at the end of this week and we reminds you that there will be a live coverage for this data.
- High-impact news could trigger false breakouts.
- If price breaks & holds above 1.03509 → Look for a long setup.
- If price rejects 1.03509 & fails to push higher → Short positions become favorable.
- Pay close attention to Fair Value Gaps (FVGs) and Fibonacci levels for confluence.
