EUR/USD drops ahead of eurozone CPI

• Eurozone inflation expected to decline to 2.7%
• ECB’s Lagarde delivers remarks later today

The euro is in negative territory in Thursday trade. In the European session, EUR/USD is trading at 1.0940, down 0.27%.

Eurozone inflation expected to ease to 2.7%

Germany’s inflation rate declined sharply in November and the eurozone is up next, with the November inflation report later today. German inflation dropped to 3.2% y/y in November, down from 3.8% in October and below expectations. This was the lowest inflation rate since June 2021 and was driven by lower food and energy inflation.

Will eurozone inflation follow suit? The markets are expecting a modest decline for November. Headline inflation is expected to fall to 2.7%, down from 2.9% in October, and the core is expected to ease to 3.9%, down from 4.2% in October. If inflation falls modestly as expected, it is unlikely to cause the ECB to reconsider its rate policy. The markets have priced in a rate cut in May 2024 and a softer-than-expected print would likely result in the odds of a rate cut being brought forward.

The ECB has signalled a ‘higher for longer policy’, as have the Federal Reserve and other major central banks. Even though inflation has been dropping, it remains considerably higher than the ECB’s 2% target and the central bank hasn’t given any indications of a rate cut. Investors will be looking for hints about rate policy from ECB President Christine Lagarde, who will speak today at an ECB forum in Frankfurt after the eurozone inflation release.

In the US, second-estimate GDP for the third quarter was revised to 5.2%, up from the initial estimate of 4.9%. The strong reading should ease fears of a recession but also provides the Fed with little reason to trim rates while inflation remains well above the 2% target. The Fed has signalled a ‘higher for longer’ stance on rates but the markets are more dovish and have priced in a rate hike in March 2024 at 45%, according to the CME’s FedWatch tool.

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EUR/USD Technical

• EUR/USD is putting pressure on support at 1.0920. Below, there is support at 1.0873
• 1.0986 and 1.1033 are the next resistance lines

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