Euro Relief as Inflation Lowers Odds of a 50bp ECB Rate Cut

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The Euro can find further near-term support as the odds of a 50 basis point rate cut recede further.

The odds are now favouring to a 25 basis point rate cut from the European Central Bank (ECB) next month after Eurozone inflation data shows ongoing stickiness in core inflation.

For the Euro, the reduced odds of a more aggressive 50bp move can provide near-term support.

The Eurozone reported inflation rose from 2.0% year-on-year to 2.3% said Eurostat. However, the all-important core inflation reading slid slightly to 2.7% from 2.8%.

"All told, the report still points to very sticky core inflation, with a third unchanged month at 2.7%. The ECB will have a tough decision on its hands in December - there are clearly some members of the Governing Council who want to go for a 50bps cut, but the inflation and labour market pictures aren't yet giving a clear green light for this," says a note from TD Securities.

Money market pricing shows investors see 38bp worth of cuts from the ECB at next month’s meeting, which is more than one 25bp cut but less than the bigger 50bp move.

This suggests there must be movement in the rates market towards either outcome, with the rule of thumb being that further reductions in expectations can boost the Euro, with the opposite being true on a move to a 50bp cut.

"If this is scaled back further, and the market moves towards expecting a 25bp cut at the December meeting, then the euro could stage a mini recovery in the short term, although we continue to think that its long-term outlook is weak," says Kathleen Brooks, research director at XTB.

Image courtesy of Nordea Markets.

Dr. Thomas Gitzel, Chief Economist at VP Bank, says the ECB can afford to cut interest rates again:

"Just as the rise in the inflation rate at the end of the year was expected, the fall in inflation in the first half of 2025 is predictable. The core inflation rate will fall significantly thanks to base effects, causing the overall inflation rate to fall noticeably again."

He says the ECB can continue its interest rate cuts in the coming year and take the deposit rate to 2%.

"In view of an economy that is becoming noticeably gloomier and an increasingly tense situation on the labour market, the currently high wage settlements will remain a brief episode. The risk of wage-driven inflation can therefore be considered manageable," he explains.

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.

Analysts at Capital Economics think the progress on inflation should allow for a 25bp rate cut in December, but nothing more, even if "there is a good case for the ECB to cut interest rates by 50bp."

"The continued strength of euro-zone services inflation in November reduces the chance that the ECB will cut interest rates by 50bp in December," says Jack Allen-Reynolds, Deputy Chief Euro-zone Economist

Capital Economics thinks services inflation - which is propping core inflation higher - will decline in December and beyond, and that the economy will remain weak. "We think bigger cuts will be on the cards sooner or later," says Allen-Reynolds.