Eurostat will publish its preliminary estimates of Eurozone inflation for December on Friday at 10:00 GMT. The figures are expected to confirm that the European Central Bank made little progress in lifting underling inflation during 2018, putting into question its plans to begin raising interest rates in the final quarter of 2019.
The harmonised consumer price index (CPI) for the euro area is expected to have risen by an annual rate of 1.8% in December. Although this is marginally below November’s 1.9% rate and down from the 2.2% peak seen in October, headline inflation has remained near the ECB’s target of “below, but close to 2%”.
A bigger concern for the ECB though is the trend for underlying inflation. The two measures of core inflation have been stuck in a flat range since 2017 and have yet to demonstrate a sustained move upwards. The annual rate of CPI excluding energy and food is forecast to remain unchanged at 1.1%, while the rate that also excludes alcohol and tobacco is anticipated to hold steady at 1.0%.
If core inflation fails to pick up over the coming months, or worse, starts to edge lower, it would become increasingly hard for the ECB to maintain its existing forward guidance for normalizing policy. The euro could then find it difficult to continue its shallow recovery against the dollar, having slid to a 2-week low of $1.1307 on Thursday.
A negative surprise in the CPI numbers could see the euro falling below immediate support in the $1.1350 area and head towards $1.1325. If this supports also fails, it would become easier for the bears to retest the $1.1307 low, which, if breached, would drag the euro below the medium-term ascending trend line and shift the focus back to the downside.
However, if the data shows some build-up of inflationary pressures, the euro may manage to cross above the 50-period moving average around $1.1410, strengthening the current weak upside momentum. A break above this hurdle would make it possible to successfully challenge the next key resistance at $1.1480.
