■ The EUR/USD finds temporary footing above 1.0900 as cooling inflation pressures reshape ECB policy expectations
■ November's HICP reading of 2.4% marks dramatic slowdown from October's 2.9%, signaling potential policy shift
■ Diverging central bank paths emerge as Fed dovishness counters ECB's cautious stance on premature rate cuts
■ Critical week ahead with Lagarde's remarks and US manufacturing data poised to dictate near-term currency flows
The currency markets entered consolidation mode Friday as the EUR/USD pair oscillated near the psychologically significant 1.0900 level. This comes after the pair retreated from its recent peak at 1.1017, with traders carefully assessing the implications of the latest inflation data from the Eurozone. The November HICP figures revealed a more pronounced cooling of price pressures than many analysts had projected, with the annual rate decelerating to 2.4% - marking the most subdued inflationary environment since mid-2021.
Market participants are parsing the inflation report's nuances, particularly the 0.5% monthly contraction in prices - a stark contrast to October's modest 0.1% increase. The breakdown shows energy costs continuing their downward trajectory while food and service price growth moderated significantly. This development has fueled speculation about potential ECB policy adjustments, with money markets now pricing in a 60% probability of rate cuts commencing as early as April 2024.
ECB President Christine Lagarde has maintained a cautious tone despite the improving inflation outlook, emphasizing that robust wage growth continues to present upside risks to price stability. Her upcoming remarks will be scrutinized for any shift in this messaging, particularly regarding the timeline for potential policy normalization. Meanwhile, the US dollar remains under pressure as markets increasingly expect the Federal Reserve to conclude its tightening cycle, with CME FedWatch tools indicating no further hikes priced in and potential cuts emerging in Q2 2024.
The US economic data calendar delivered mixed signals Thursday. While core PCE inflation met expectations with a 0.2% monthly increase, labor market indicators showed tentative signs of softening. Weekly jobless claims climbed to 218,000, and continuing claims reached their highest level in two years at 1.93 million. These developments have reinforced the narrative of a gradually cooling US economy, limiting the dollar's upside potential against its European counterpart.
Attention now turns to Friday's key events, including ECB President Lagarde's scheduled appearance and the release of US ISM Manufacturing PMI data. Currency traders will be particularly attuned to any hints about the ECB's reaction function to the latest inflation prints, while manufacturing sector health could provide important clues about the US economic trajectory. Fed Chair Powell's subsequent remarks may offer additional guidance about the central bank's assessment of current economic conditions and the potential path for monetary policy.