Eurozone CPI May Alter ECB Policy

Inflation in the Eurozone is expected to see a resurgence towards the end of the year, prompting the ECB to maintain a more cautious stance despite the prevailing economic situation.​

A Temporary Rebound

The Eurozone will release inflation data for some of its major economies today and tomorrow, with the reading for the entire shared economy set for release on Friday. Typically, the market reacts to data from larger countries as it indicates the direction for the entire Eurozone. However, with German and French economic performance at odds with other nations, the euro could face volatility as market participants try to understand the implications of the "fragmentation" in inflation figures for the ECB's final meeting of the year.

While headlines focus on Trump and his tariff threats, the euro has been declining against the dollar since late September. A stalling economy and a messy political situation have left the shared currency trending towards parity on expectations that the ECB will have to intervene to shore up the situation, with the odds of a half-point rate cut fluctuating around the 50-50 barrier. The currency pair managed a rebound this week, which seemed more related to easing geopolitical tensions than resolving internal problems. Now, inflation is expected to rise again, potentially constraining the ECB's scope of action to remedy the situation.​

Gathering Momentum

The ECB has already cut interest rates three times, and there appears to be a growing consensus among its members that inflation has been defeated, shifting concerns to the lack of economic growth. The traditionally rigid German demands for currency stability and fiscal discipline are facing the most pressure, with a lame-duck Chancellery infighting over spending. Even former Chancellor Angela Merkel advocated changing the controversial "debt-break" rule, which would entitle Europe's largest government to engage in deficit spending to support growth. The threat of tariffs across the Atlantic might justify Germany to allow more monetary easing and government spending to stimulate the economy.

While the ECB expects a temporary increase in inflation during the fourth quarter before it falls back to target next year, policymakers and investors might overlook the CPI data to focus on the economy. However, a sudden, larger-than-expected spike in inflation could unsettle markets for a brief period. The Flash CPI for the Eurozone in November is expected to rise to 2.3% from 2% previously, marking the second consecutive month of increases. This is expected mainly due to transient factors, such as higher fuel and food prices. Meanwhile, the core rate is expected to accelerate at a slower pace to 2.8% from 2.7% previously.​

EURUSD Near Range Low

After failing to bounce at the 1.06 level and testing it as resistance, the risk of EURUSD sliding below 1.0450 and the recent 2-year low of 1.0334 remains high. A lower break could open the door to the key long-term uptrend leg between 0.9533 and 1.1280, specifically targeting the 1.0176 Fibonacci, and potentially confirm an exit from the 1.1280-1.0450 range to parity. Conversely, if 1.0600 is reclaimed as support, it could unlock further upside towards 1.0700, 1.0760 and eventually 1.0937.​

Source: SpreadEx / EURUSD

Key Takeaways

Eurozone inflation is expected to see a resurgence towards the end of the year, potentially constraining the ECB's ability to address a stalling economy in the region. While the bank expects a temporary increase in CPI before it falls back to target next year, a larger-than-expected spike could unsettle markets as a fragmented economic performance across nations and ongoing political tensions add complexity. The upcoming data release could still influence the ECB's policy stance, with markets closely watching for any potential signs of rate cuts to stimulate growth.