EUR/USD: Declining inflation puts pressure on the ECB

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The Euro was starting to decline against the Dollar, a decline which was accentuated with yesterday’s publication of a marked slowdown in European inflation, suggesting anticipation of the process of lowering rates.

Forex traders have taken note of the first estimates of consumer prices for the month of November in the Euro Zone. And surprise, the dynamic of slowing inflation is even greater than expected. Excluding food, energy, alcohol and tobacco (elements considered volatile), prices increased at an annualized rate of 3.6% in November, compared to a target of 3.9% and a month of October of 4.2%! A very significant slowdown which should bring a little flexibility to the ECB’s monetary policy. “The larger-than-expected drop in inflation in November means it is becoming increasingly untenable for “European Central Bank (ECB) members” to pretend they are not even considering cutting rates “, explains Capital Economics. “We now expect a first drop for next June, rather than for September,” adds the think tank. All products combined, inflation is reduced to 2.4% according to this first estimate from EuroStat. The next publication covering all data for the month of November 2023 is scheduled for December 19, 2023.

“At the next ECB policy meeting in December, the focus will be on how much inflation forecasts should be adjusted in the short term and up to 2026. Christine Lagarde (and the hawks) will likely continue to focus on the impact of wage growth on inflation. But wage growth is a lagging indicator and we think we’ve peaked.” say the strategists at Pictet AM, for whom this sharp decline in inflation is putting pressure on the ECB.

Across the Atlantic, PCE (Personal Consumption Expenditures), the preferred gauge of the American Federal Reserve (Fed) to measure inflation, increased by 3% year-on-year in November, compared to 3.4% last month. The “core” index, excluding energy and food prices, increased by 3.5%, a figure in line with the consensus of economists surveyed by the Wall Street Journal.

This morning we will note a significant gap between the manufacturing PMI in the Euro Zone (final data for November), at 44.2, and the first estimates, at 43.8. To follow the ISM manufacturing PMI at 4:00 p.m. and a speech from J Powell, President of the Fed, at 8:00 p.m.

At midday on the foreign exchange market, the Euro was trading against $1.0900 approximately.

KEY GRAPHIC ELEMENTS

After a bullish runaway characterized by the candle in marubozu school on November 14, followed by a very short consolidation and an early bullish extension, a technical adjustment is underway, an adjustment catalyzed by Thursday’s statistical releases.

MEDIUM TERM FORECAST

Considering the key graphical factors that we have mentioned, our opinion is neutral in the medium term on the Euro Dollar (EURUSD).

We will maintain this neutral opinion as long as Euro Dollar (EURUSD) prices are positioned between support at 1.0822 USD and resistance at 1.1012 USD.

DAILY DATA CHART