European Union inflation has declined, and the report in November brought good news. Headline inflation fell to 2.4% year-on-year, down from 2.9% in October and below market expectations of 2.7%.
A significant drop in energy prices was the main driver of the significant decline. Core inflation, which is higher than the headline figure, fell to 3.6%, down from 4.2% in October and below market expectations of 3.9%.
The weak inflation report pushed EUR/USD up 0.74% on Thursday, but analysts believe ECB policymakers will be excited by the data. This is because it shows that aggressive tightening continues to control inflation.
The headline CPI has fallen to its lowest level since July 2021 and is close to hitting the 2% inflation target. However, core CPI, which excludes food and energy and is a better indicator, will have to fall significantly before the ECB can say the fight against inflation is over.
The ECB has indicated that they do not plan to cut rates anytime soon. This has created a significant gap with financial markets, as market players believe that the ECB needs to respond to falling inflation and weak growth by cutting rates.
The market has carried expectations of a rate cut into April due to weak inflation reports. As in the past month, the market has assessed a rate cut as early as July. Attention is focused on whether ECB President Lagarde will stick to high interest policy for longer or not?
The US will this week with ISM Manufacturing PMI data. The manufacturing sector has been in a prolonged slump and the PMI has shown contraction for twelve consecutive months. The PMI is expected to increase to 47.6 in November, compared to 46.7 in October. A reading below 50 indicates contraction.
Investors will be listening closely to Jerome Powell's speech at 12 o'clock, looking for clues on the upcoming rate decision.
