Euro Under Pressure After France Records Biggest Inflation Rate Slump in 34 Years

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The Euro is under pressure against the Dollar and Pound, with France's revised inflation data for September sharpening focus on Thursday's European Central Bank decision.

France reported -1.3% month-on-month CPI inflation in September, a downgrade from the preliminary estimate of -1.2%. The annual rate was lowered to 1.4% from 1.5% in the initial release, putting it comfortably below the ECB's target of 2.0%.

To put the developments into perspective, this is the biggest single monthly fall in French CPI for over 34 years.

Faced with such data, the ECB has limited ammunition to justify keeping its base interest rates at current levels, and two more interest rate cuts in 2024 are now highly likely.

The dawning realisation that the ECB could now 'outcut' the Federal Reserve and Bank of England explains why the Euro-Pound exchange rate and Euro-Dollar exchange rate are under pressure.

Key to the Euro's outlook will be the tone of the ECB's guidance about future policy decisions. "Dovish guidance (growth vs inflation, door open for December?) is a downside euro risk," says Kenneth Broux, a strategist at Société Générale.

The ECB has consistently communicated that its policy stance will depend on the nature of incoming data, which conveys a sense of restraint.

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR. Please request a copy here.

However, the data is clear that the battle against inflation in France has been won, particularly given last week's announcement that the new government will look to save €60BN in the coming year, which will create a significant drawdown on French demand.

At the same time, Germany's economy has stagnated, which is why Bundesbank chief Joachim Nagel said last week that he is open to considering another ECB interest rate cut at its meeting next week. He said German economic growth in the second half would be weaker than expected.

Data out today confirmed Spain's annual inflation rate fell 0.6% m/m in September, and the annual rate stood at 1.5%.

For the Eurozone as a whole, annual inflation was reported at 1.8% in September 2024, down from 2.2% in August.

The last straw for ECB 'hawks' - those who want to stay cautious when considering rate cuts - is that services inflation remains relatively elevated at 4%.

There is an argument that services inflation must fall further to sustainably bring headline inflation below 2.0%.

However, services inflation is often considered a lagging indicator and the overwhelming decline in headline inflation will ultimately pull it lower in the coming months.