The market responded to the Eurozone inflation data by dampening speculation of an ECB interest rate cut. This strengthened the EUR/USD exchange rate.

Several rivals of the US dollar rallied after the impact of the Federal Reserve boss's surprise statement faded yesterday. The euro was also buoyed by the release of Eurozone inflation data that outperformed market expectations. In the Asian session on Friday (2/February), EUR/USD maintained its gains around 1.0875, and EUR/GBP consolidated support at 0.8540s.

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Yesterday's Eurostat preliminary report showed that the Consumer Price Index (CPI) continued to decline. Still, the pace was not as fast as the consensus forecast. Headline CPI data came in at +2.8% (year-on-year) in January, lower than the +2.9% rise in December but higher than the consensus estimate of +2.7%.

Core CPI data continued to hold excessively high above the European Central Bank (ECB) target. Core CPI printed at +3.3% (year-on-year) in January, lower than the +3.4% increase in December but higher than the consensus estimate of +3.2%.

The market took note of the report and then responded by dampening speculation for an ECB rate cut. The market lowered its total projection of ECB rate cuts this year from 150 basis points to 140 basis points only. Some analysts think this is a positive sign for the euro.

"The European Central Bank and its committee members will be firmly looking to readjust the market expectations of future rate cuts," says Pierre Roke, Associate at Validus Risk Management.

"After starting the year above 1.10 the Euro has gradually declined and settled between 1.08 and 1.09 throughout most of January, before dipping closer to 1.08 after last night's hawkish FOMC meeting. On the back of this small re-adjustment of rate expectations, the Euro will likely again advance vs the Dollar closer to levels seen throughout January," says Roke.

In the short term, markets will focus on the NFP release in the New York session later tonight. If the actual NFP number is weaker, markets will likely reconsider the chances of a rate cut starting in March. However, a better NFP will confirm the Fed's ability to keep interest rates high for longer.