Eurozone inflation dents euro, US dollar rises from three-month low

THE euro fell on Thursday (Nov 30) after eurozone inflation eased more than expected this month, fuelling bets of early European Central Bank (ECB) rate cuts, while the greenback rose from a three-month low but was still set for its biggest monthly drop in a year.

Consumer price growth in the 20 nations that share the euro currency dropped to 2.4 per cent in November from 2.9 per cent in October, well below expectations for a fall to 2.7 per cent.

“The message from today’s European CPI (consumer price index) data is clear,” said Matthew Landon, global market strategist at JPMorgan Private Bank. “Disinflation is continuing at a rapid pace in Europe – and, importantly, more swiftly than the market or even the ECB’s expectations.”

“Falling inflation and a stagnant economy could justify ECB cuts as soon as the first quarter of next year in our view,” Landon said.

The euro dropped as much as 0.5 per cent against the US dollar to US$1.0910 and last stood at US$1.0930. On Wednesday it hit its highest level since August at US$1.1017.

Markets are now fully pricing in a rate cut from the ECB by April, while around 115 basis points of easing is priced by the end of next year.

ECB policymaker Fabio Panetta said on Thursday the central bank may be able to ease monetary conditions if persistently weak output accelerates the decline in inflation.

Meanwhile, the US dollar index, which measures the US currency against six others including the euro, rose 0.4 per cent to 103.25, picking up after touching 102.46 on Wednesday, its lowest level since Aug 11.

The index is still down around 3.3 per cent in November, its biggest monthly fall since last November, on growing expectations the Federal Reserve will also cut interest rates in the first half of 2024.

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“The key drivers in November for the (US) dollar weakness have been the benign inflation data and the loosening signs of the labour market,” said Mohamad Al-Saraf, associate, FX and rates strategy at Danske Bank.

“The notion of a soft landing has increased and usually that’s a bad environment for the (US) dollar.”

Investors will be all ears on Friday when Fed chair Jerome Powell takes centre stage in the wake of Fed governor Christopher Waller on Tuesday flagging a possible rate cut in the months ahead. It will also be the last time Fed policymakers will be able to share their views before they enter the quiet period before the December policy meeting.

Before that, the spotlight will firmly be on Thursday’s crucial personal consumption expenditure (PCE) price index – the Fed’s targeted measure of inflation.

Christopher Wong, currency strategist at OCBC, said the data will offer a glimpse into whether the disinflation trend seen so far remains intact.

“If core PCE undershoots expectations to the downside, then USD may extend the move lower again,” he said.

US rates futures markets are now pricing in more than 100 basis points (bps) of rate cuts next year starting in May, and the two-year Treasury yield is close to its lowest since July – it has slumped about 40 bps this week alone.

Meanwhile, expectations that the Bank of Japan will soon end its negative rate policy have pulled the yen up from the depths, and in the process, eased pressure on the central bank to support the currency via direct FX market intervention.

On Thursday, the yen weakened 0.2 per cent to 147.575 per US dollar, but remains close to the two-and-a-half-month high of 146.675 per US dollar it touched on Wednesday. The Japanese currency has firmed almost 3 per cent against the US dollar in November and is on course for its strongest month this year.

Bank of Japan board member Toyoaki Nakamura said on Thursday the central bank will likely need some more time before phasing out its massive stimulus.

Sterling was last at US$1.2655, down 0.3 per cent on the day, while the Australian dollar fell 0.2 per cent to US$0.6605. It is still up 4.2 per cent in November – its steepest one-month gain in a year. REUTERS