What to expect from EA's CPIs

After Germany manages lower fuel consumption and energy prices come down, will EU inflation start to rationalise?

Weathering the energy crisis

German energy prices started to creep back in November as cold weather hit the country. Other parts of Europe had unseasonably warm weather, underscoring the difficulty in predicting prices when one of the key components depends mainly on meteorological conditions. But prices are still below the summer peak, which could give the market some positivity heading into the winter.

Later today is the release of preliminary German Inflation data for November, which slowly builds through the morning as each state reports its respective price changes. Overall, however, expectations are for Germany to experience a slight reduction in inflation to 10.3% from 10.4% prior, aided by a monthly drop in prices of -0.2% compared to 0.9% in October.

It's not all good news

Tomorrow it's France's turn to report inflation figures, where the situation is expected to reverse as annualised CPI change to November is expected to tick up to 6.3% compared to 6.2% prior. Usually, with the two largest economies of the Eurozone reporting, the market can figure out what the headline number will be. So, unless there is a significant deviation from the trend in France and Germany, the Eurozone data will likely cause an insignificant market move.

Eurozone inflation is expected at 10.4%, down from 10.6% registered last month, which was below consensus. That would be the first consecutive drop in inflation since the start of the current cycle and might help support hopes that a peak has been reached. Meanwhile, core inflation is expected to remain steady at an annualised rate of 5.0%.

The next question is whether a slight decline will be enough to hold the ECB back from another aggressive hike. The data could be revised in the second reading before the ECB meets in two weeks, but this is likely to set the tone for expectations until then.

EUR/USD forms a double top

EUR/USD recently hit a peak near $1.05 (R1), followed by a steep decline towards $1.03, but still above the channel. The swift move left a tail on the charts, calling for a trend change. If the floor at $1.0220 (S2) holds firm, it might turn the pair sideways or send it higher, with $1.06 (R2) being the next resistance. If not, $1.02 (S3) is imminent support, with its breach increasing the chances of a reversal at the said peak. The upper trendline must be penetrated first, around $1.03 (S1).

Key takeaways

Eurozone inflation is expected to drop for the first time in several months as energy prices are still below the summer peak, which could help support hopes that a peak has been reached. However, it still needs to be determined whether this will be enough to prevent the European Central Bank from taking further action to raise prices. German and French data ahead of the Eurozone's release might help the market figure out the headline number.

Source: SpreadX