Inflation rates in Germany and Italy are slowing faster than expected, paving the way for a further economic slowdown across the eurozone and paving the way for further aggressive interest rate cuts.
Germany’s consumer price index slowed to 1.6% year-on-year in September, remaining almost flat, according to estimates published by Destatis on Monday. Analysts’ average forecast slowed to 1.7% from 1.9% last month.
Italy’s consumer price inflation rate slowed further to 0.7% year-on-year, compared to 1.1% in the previous month and 0.8% expected. This is the first month-on-month drop of 0.2% since November last year.
The ECB has described its inflation target as “below, but close to, 2%.” At the end of last week, the average analyst forecast was for euro area CPI to fall to 1.9%. Downside risks have increased following data from Italy and Germany, which could formally pave the way for further downgrades by the ECB.
But what’s interesting is that so far the market has expected less action from the ECB (down 25-50 points by year-end) than the Fed, and the Fed has expected less action from the ECB (25-50 points down by the end of the year) than the Fed. This is expected to be lower than that. Next two meetings. Central bankers in the most influential countries do not like to surprise markets, so they change their rhetoric to meet market expectations or try to manage expectations.
In our view, we should expect the ECB to soften its rhetoric, supported by softer inflation data and aggressive rate cuts from its main rival, the Fed. If our view is correct, EURUSD could retreat from its 2.5-year highs around 1.12 to 1.10 and recharge the bulls.
FxPro Analyst Team
