- Eurozone inflation falls to 2.4%
- Powell’s push back doesn’t faze markets
- Eurozone and Germany to release Services PMIs on Tuesday
The euro is down considerably on Monday. In the North American session, EUR/USD is trading at 1.0817, down 0.60%. The euro hasn’t posted a winning day since November 28th and has fallen 1.6% during that time.
Eurozone inflation has been falling and the November report eased to 2.4% y/y, down from 2.9% in October and below expectations. Core inflation also fell from 4.2% to 3.6% and was lower than the forecast. Falling inflation has raised speculation that the ECB could trim rates as early as April, and the euro has weakened on expectations of a rate cut.
The ECB has welcomed the inflation news but hasn’t put rate cuts on the agenda. On Monday, ECB Vice-President Luis de Guindos said that the drop in inflation was good news but that future rate decisions would be data-dependent. ECB President Lagarde has repeatedly said that rates will stay in restrictive territory for an extended period of time and has warned that inflation could pick up in early 2024.
Powell pushes back against rate cuts, but not enough
Federal Reserve chair Jerome Powell tried to dampen rate cut expectations on Friday but the markets didn’t budge. Powell noted that monetary policy is “well into restrictive territory” and that inflation is “moving in the right direction”. The markets interpreted these remarks as signals that the Fed is done with rate tightening. Although Powell warned that it was premature to assume that the Fed had achieved a “sufficiently restrictive stance”, investors viewed the remarks as dovish. Most Fed members have been towing Powell’s line, but we continue to see a gaping disconnect between Fedspeak and market expectations concerning rate policy.
- EUR/USD is putting pressure on support at 1.0803. Below, there is support at 1.0722
- 1.0910 and 1.0991 are the next resistance lines
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