Euro is currently trading weaker against its European peers and Dollar as market anticipates the release of Eurozone CPI flash data for December. Expectations are set for the headline CPI to increase from 2.4% yoy to 3.0% yoy, ending a six-month streak of consecutive declines. Meanwhile, core CPI is expected to slow down from 3.6% yoy to 3.4% yoy.
The jump in headline inflation shouldn’t be a surprise to ECB officials. Executive Board member Isabel Schnabel had acknowledged last monththat a temporary uptick in inflation was possible. But she also expected it to “gradually” fall to ECB’s 2% target by 2025. The anticipated continued decline in core inflation could reinforce the ECB’s confidence that the trend of disinflation is still ongoing.
Currently, swap markets are factoring in approximately 1.6 percentage points of rate cuts by ECB this year, with 60% probability of these cuts commencing as early as March. The critical consideration now is the pace of disinflation: whether it is rapid enough to justify earlier rate cuts, or slow enough to warrant maintaining the current restrictive policy stance for a longer duration.
Today’s Eurozone CPI data could be pivotal for the Euro’s performance. Any results that fall short of expectations might trigger another wave of selling pressure. Specifically, break of 0.9252 support will resume EUR/CHF’s down trend from 1.0095, and target 100% projection of 0.9995 to 0.9416 from 0.9683 at 0.9104 next.
