Calming expectations for the future tightening of the European Central Bank's policy after the bloc's recent inflation figures contributed to the continuation of bearish pressure on the EUR/USD currency pair. This tested the support level at 1.0290 before settling around 1.0320 at the time of writing.
It seems that the euro-dollar currency pair will remain under downward pressure until the reaction from the announcement of the important US job numbers tomorrow, which will have a direct and strong reaction on the future expectations of raising US interest rates. Before that, it was announced that inflation in the eurozone slowed for the first time in a year and a half, giving a glimmer of hope for the European Central Bank in its struggle to cool the worst consumer price shock in a generation. The reading for November was 10%, statistics office Eurostat said, below the 10.4% median estimate of economists polled by Bloomberg. The decline, from 10.6% in October, was the largest since 2020 and was thanks to slow progress in energy and service costs, even as food prices grew more rapidly.
European Central Bank officials have highlighted the data as crucial in their judgment to raise interest rates by 75 basis points for the third time in a row - an outcome that may now be less likely. Policymakers are likely to consider the report at a meeting scheduled for Wednesday, which is their last meeting before the Dec. 15 decision. Money markets are pricing in around 57 basis points of interest rate hikes by the end of the year. European bonds extended losses after Wednesday's release, with the two-year German bund yield rising six basis points, at 2.17%.
Although only one month of data was released, the prospect of a flickering flicker of price pressures will bring relief to the European Central Bank after a disappointing half-year of numbers that repeatedly exceeded economists' forecasts. This coincides with US statistics released in October that went in the same direction, prompting some Fed officials to consider a downward shift in the pace of US interest rate hikes.
Inflation in the eurozone remained in double digits for a second month, and officials this week sought to warn of a false dawn. "It would surprise me" if price growth peaked, Christine Lagarde, the head of the European Central Bank, told the European Parliament on Monday. Her deputy, Luis de Guindos, lamented earlier this month about previous "negative surprises". On Tuesday, he stressed that "the signal that we must continue to follow is the evolution of core inflation."
Perhaps the VP was referring to the so-called base measure, which excludes volatile items such as food and energy. Wednesday's report showed that measure was unchanged at a record 5%. The figures follow a string of weaker consumer price readings from across the Eurozone this week. Where the inflation rate fell in Germany, Italy, Spain and the Netherlands. In France, it remained unexpectedly stable. Price growth accelerated only in three eurozone countries.
ECB officials will use the data as an indicator of price pressures and as input for new quarterly economic forecasts. While showing the trajectory of inflation, the forecast is also likely to reveal how the cost shock to the region is crushing growth, with a recession now likely.
For their part, policy makers have raised interest rates for the Eurozone by 200 basis points since July and now must decide whether to offer another 75 basis points or opt for a smaller step. It is not clear if the low inflation figure will be enough to push the ECB towards an increase of just half a point. Last week, Executive Board member Isabelle Schnabel actually sought to cast doubt on the possibility of a slowdown in tightening.
"The data received so far indicates that there is still limited scope for slowing the pace of interest rate adjustments," she said.
Euro predictions against the US dollar today:
- The EUR/USD price movement to break the support level at 1.0290 is important to confirm the future of the bears’ dominance over the performance of the currency pair.
- The general outlook over the same time period will change to bearish if prices move further down to target the support levels 1.0220 and 1.0100, respectively.
- On the other hand, and over the same time period, breaking the resistance 1.0450 again will be important for the bulls to control the trend.
Today, despite the announcement of a package of economic data for the eurozone, the greatest interest is in the results of US economic data, especially the reading of the personal consumption expenditures price index, the preferred American inflation reading of the US Federal Reserve. The euro dollar may remain bearish until the reaction from the US jobs numbers on Friday.
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