EUR/USD holds ground as weak US GDP clashes with firm inflation data

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The Euro (EUR) trades little changed against the US Dollar (USD) on Friday as investors digest the latest batch of US economic data. At the time of writing, EUR/USD hovers near 1.1763, recovering modestly from an intraday low of 1.1743, but remains on track for a weekly loss.

EUR/USD holds modest losses as weak US GDP clashes with firm inflation data.
US Q4 GDP slows sharply to 1.4%, missing expectations
Core PCE inflation accelerates, keeping Fed easing bets in check.

The pair struggles for clear direction as a weaker-than-expected US Gross Domestic Product (GDP) for Q4 contrasts with firmer-than-anticipated Personal Consumption Expenditures (PCE) inflation data.

Advance estimates showed the US economy grew at an annualized rate of 1.4% in Q4 2025, slowing sharply from 4.4% in the previous quarter and missing the 3.0% consensus forecast. However, the GDP Price Index held steady at 3.7%.

Meanwhile, inflation data reinforced the view that price pressure remains sticky. Core PCE, the Federal Reserve’s (Fed) preferred inflation gauge, rose 0.4% MoM in December, accelerating from 0.2% previously and beating expectations of 0.3%. On an annual basis, Core PCE climbed 3.0%, above the 2.8% prior reading and exceeding the 2.9% forecast.

Headline PCE inflation also firmed in December. The PCE Price Index rose 0.4% MoM, accelerating from 0.2% in November and exceeding the 0.3% consensus. The annual rate ticked higher to 2.9% from 2.8%.

The data briefly stirred short-term volatility in the US Dollar. The US Dollar Index (DXY), which measures the Greenback’s value against a basket of six major currencies, is hovering around the 98.00 mark after dipping to an intraday low near 97.80.

The soft growth print points to slowing economic momentum, while sticky inflation keeps the Fed’s cautious policy stance intact. Minutes from the Fed’s January monetary policy meeting, released earlier this week, showed policymakers remain concerned about persistent inflationary pressure, limiting the scope for near-term easing. Officials also noted that further rate hikes could be warranted if inflation fails to move sustainably toward the 2% target.

However, the data did little to materially shift market expectations, with traders continuing to price in two rate cuts later this year. According to the CME FedWatch Tool, the first reduction in borrowing costs is still largely anticipated in June.

Separately, preliminary S&P Global Purchasing Managers Index (PMI) data showed the Composite PMI edged down to 52.3 in February from 53.0 previously, while the Manufacturing PMI slipped to 51.2 from 52.4 and the Services PMI eased to 52.3 from 52.7.

Traders now await the University of Michigan (UoM) Consumer Sentiment Index and inflation expectations data due later in the American session.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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