The euro is almost unchanged on Monday, trading at 1.0831. The euro is coming off a strong week, as EUR/USD rose 1.8%. Earlier in the day, the euro hit 1.0874, its highest level since April 2022.
Will Eurozone inflation sink?
Eurozone inflation has been dropping and slipped into single digits in December. This is a remarkable turnaround after a year in which inflation soared and constantly beat expectations after Russia invaded Ukraine. In December, the ECB projected that inflation wouldn’t fall to the 2% target until 2025, but it now appears that the target could be reached much earlier, perhaps in Q4 of 2023.
One of the key drivers of higher inflation was soaring energy prices, triggered by the Ukraine war. Oil and gas prices have since fallen substantially, and a relatively warm winter in Europe and extensive efforts to diversify supplies have eased concerns of an energy crisis in Europe. The downtrend in energy prices could of course change before the winter ends, but in the meantime, inflation is dropping and the economic outlook for the eurozone appears brighter. Last week, Goldman Sachs revised upwards its 2023 GDP forecast for the eurozone from -0.1% to a small gain of 0.6%.
The positive news on the inflation front is unlikely to result in any change in policy from ECB policy makers. Headline inflation fell from 10.1% to 9.2% in December, but the core rate, which is a key factor for the ECB, has been rising. The ECB has said more rate hikes are coming in 2023, a stance that was echoed by ECB member Rehn earlier today.
In the US, UoM Consumer Sentiment jumped to 64.6 in December, beating the forecast of 60.5 and above the November reading of 59.7. Inflation expectations for 2023 decreased to 4.0%, down from 4.4%, although long-term expectations inched higher.
- 1.0829 is a weak support line, followed by 1.0691
- There is resistance at 1.0921 and 1.1010