Euro Drifting as Eurozone Inflation Falls to 2.9%

The euro is trading quietly on Friday. In the European session, EUR/USD is trading at 1.0870, up 0.17%. The US dollar sustained sharp losses after a soft inflation report on Tuesday, and the euro took advantage with a massive gain of 1.68% the same day. Since then, the euro has been relatively calm.

Eurozone Inflation Confirmed at 2.9%

Eurozone inflation came in at 2.9% y/y in October, confirming the initial report. This was down sharply from 4.3% in September and matched the consensus estimate. The print was the lowest since July 2021 and was driven by a decline in energy and food prices. Monthly, inflation eased to 0.1%, down from 0.3% in September and matching the consensus estimate. The core rate, which remains well above the headline figure, showed a modest decrease, dropping from 4.5% to 4.2%, matching the consensus estimate.

The ECB held rates at 4.0% in October after 10 successive rate hikes and with inflation continuing to fall, expectations are that the central bank will prolong its hold on rates, barring an unexpected upswing in inflation. The economic picture is not pretty, as the eurozone economy is stagnating and Germany, once a global powerhouse, has become a deadweight on the eurozone with its weak economy. Lagarde said last week that the ECB will not be trimming rates in the “next couple of quarters” while acknowledging that “inflation has come down massively” and hinting that rates may have peaked.

In the US, there were further signs this week that the economy is losing steam. Inflation was lower than expected at 3.2% and retail sales surprised to the downside with a 0.1% decline. As well, unemployment claims hit a three-month high at 231,000. US Treasury yields fell on Thursday to 4.45%, down from 4.53%, as speculation continues to rise that the Fed has ended or is very close to ending the current rate-tightening cycle. The markets widely expect a pause at the final rate meeting of the year in December and have priced in a rate cut as early as May 2024.