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Euro US Dollar (EUR/USD) Exchange Rate Drops amid Rapid Eurozone Inflation Cooldown

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Euro US Dollar (EUR/USD) Exchange Rate Slides as Eurozone Inflation Decelerates

The Euro US Dollar (EUR/USD) exchange rate is falling today, following a below-forecast set of Eurozone inflation data.

At the time of writing, EUR/USD is trading at around US$1.0919, a fall of around 0.5% from the morning’s opening rates.

Euro (EUR) Drops as Inflation Cools Beyond Estimates

The Euro (EUR) is struggling to attract support this morning, following the latest Eurozone inflation data.

In November, the bloc’s headline consumer price index cooled beyond forecasts to 2.4%. Core inflation similarly surprised markets, decelerating to 3.6%. This is prompting investors pare back their bets on further tightening from the European Central bank (ECB), and eye the prospect of rate cuts.

Bert Colijn, Senior Economist for the Eurozone at ING, commented:

‘There is still a lot more of the impact of tightening to come as interest payments are still increasing. The market is therefore right to start looking at rate cuts for 2024. We think the first one could well happen before the summer.’

Furthermore, today’s data indicates that inflation is cooling significantly more than the ECB forecast a few months ago. This puts the end in sight for the bank, as inflation nears its target rate of 2%. This is likely to weigh further on the Euro over today’s trade, as ECB hike bets continue to diminish.

Additionally, an increase in the German unemployment rate may contribute additional headwinds for the common currency.

In November, unemployment in the bloc’s largest economy increased to 5.9%, above an expected hold at 5.8%.

US Dollar (USD) Rises Ahead of Core Inflation Data

The US Dollar (USD) is strengthening this morning, as investors look ahead to the afternoon’s core PCE price index data.

As The Federal Reserve’s preferred gauge of inflation, the forecast of a slowdown to 3.5% could weaken USD later today. This could reinforce expectations of an imminent interest rate cut from the Fed, which may reverse USD’s uptrend.

However, the market mood is decidedly cautious this morning, bringing safe-haven flows to the ‘Greenback’. This could keep USD exchange rates strong, even if inflation cools.

Euro US Dollar Exchange Rate Forecast: Central Bank Speeches in Focus

Looking ahead for the Euro, European Central Bank President Christine Lagarde is due to deliver a speech tomorrow morning.

If she aims to temper bets of imminent interest rate cuts, the common currency could strengthen if she proves persuasive. However, on the back of today’s cooler-than-expected inflation print, she may be unsuccessful and could have little impact on EUR exchange rates.

For the US Dollar, tomorrow brings the release of the latest ISM manufacturing PMI, which is expected to show an improvement in November’s activity. However, any USD gains may be limited as it is expected to remain in contractionary territory.

This is followed by a speech by Federal Reserve Chair Jerome Powell. If he takes a hawkish stance in his comments, USD could strengthen. However, if he seems unconvincing and Fed cut bets increased, USD may fall.