EUR: Inflation Drop Expected, Growth Concerns Prevail

EUR: A widely expected further drop in inflation

Early signals from Germany and Spain have been encouraging: inflation in the eurozone is falling faster than expected, also on the core side. Today, the rest of the area’s countries will release November’s inflation figures, with France’s CPI expected to have slowed to 3.7%, and the eurozone’s aggregate headline inflation seen decelerating from 2.9% to 2.7%, with the core rate moving from 3.9% to 4.2%.

The implications for the euro would probably be material only if the figures come in surprisingly higher than expected. That’s because markets are already pricing in 75bp of easing by the European Central Bank in 2024, with no chance of any more hikes. Above all, the focus appears to be much more on the deteriorating growth outlook than on a well-telegraphed inflation slowdown.    

That said, lower inflation is hardly ever good for a currency and may keep the euro's upside room capped today, even though data from the US could cause large swings in EUR/USD regardless. We still favour a return to sub-1.0900 as opposed to a sustainable rally beyond 1.1000.