Eurozone Inflation & Year-End Outlook For EURUSD

Inflation in the shared economy could shake expectations that the interest rate gap between the EU and the US will narrow, and it could continue to support the EURUSD for the rest of the year.

Key Points for ECB/Euro

• Economists are projecting that the ECB will keep rates unchanged at the December policy meeting.
• Markets expect the ECB to hold for the whole of next year while the Fed cuts rates, which could support the EURUSD as the interest rate gap shrinks.
• Traders are on the lookout for signs that Eurozone inflation might move to the upside, as CPI is just slightly above target and is expected to rise in the largest European economies.

ECB Expected to Hold Rates From Now On

Since the summer, inflation in the Euro Zone has settled around the 2.0% target, while economic growth has remained steady, if a bit anaemic. This is in contrast with other major central banks, which are dealing with economic uncertainty, high debt levels, or both. As a result, a majority of economists now predict that the ECB will keep rates unchanged through 2026, despite some global economic uncertainty. Almost 95% of the surveyed economists in a recent Reuters poll said they expected the ECB to keep rates unchanged at the upcoming December monetary policy meeting. About two-thirds of them expected no rate change until the end of next year.

This contrasts with expectations for the Fed, which now has futures markets pricing in an over 80% chance of a rate cut in December. The FOMC is expected to continue easing next year amid a slowdown in the US economy and US President Trump's appointment of more dovish members to the Fed's rate-setting board. The ECB's interest rate is 2.0%, while the Fed's reference rate is twice that. Markets are pricing in about 100 bps of Fed easing next year, with the closing of the rate gap putting upward pressure on the EURUSD amid dollar weakness.

EU Inflation Expected to Stay Under Control

The projections assume that the current conditions can be maintained, particularly that inflation in the Euro Area will remain around the target level. Over the last week, ECB officials have repeated President Christine Lagarde's post-rate decision phrase that inflation and policy are in "a good place". However, they did express concerns about CPI in the services sector, which has remained slightly hot, with traders looking to data for reassurance that the inflation will stay under control. An unexpected bump up in consumer prices could put pressure on the ECB to take a more hawkish stance and threaten Europe's fragile recovery. German and French flash November CPIs will be published on Friday, offering some insight into what might be the trend for the whole of the Euro Area. The French November CPI is projected to accelerate to 1.1% from 0.9% in October, while German prices are forecast to rise to 2.4% from 2.3% prior.

EURUSD Inverse H&S in Play

Fibre appears to be consolidating between 1.1656 and 1.1491 after bottoming out at 1.1467 in early November, with the recent peak at 1.1613 acting as a potential rejection of a major descending trendline. Despite corrections typically leading to trend continuations, the entire formation resembles an inverse head and shoulders, with the neckline breakout above 1.1600 increasing the odds of EURUSD rising towards 1.1730 (the measured-move projection comes over 1.1800).  If the short-term drop towards 1.1550 reverses course or prices fail to decline as low as the 1.1500 shoulder, the chart pattern could play out. However, losing the swing bottom would bring 1.1491 back into focus, exposing 1.1465 and the major supports of 1.1450 and 1.1400 on the way down.

Source: SpreadEx | EURUSD, 4-hour Chart