LONDON—The euro fell on Thursday after eurozone inflation eased by more than forecast this month, fuelling bets of early European Central Bank rate cuts, while the dollar rose from a three-month low but was still set for its biggest monthly drop in a year.
Consumer price growth in the 20 nations that share the euro currency dropped to 2.4 percent in November from 2.9 percent in October, well below expectations for a fall to 2.7 percent.
“The message from today’s European CPI data is clear,” said Matthew Landon, global market strategist at J.P. Morgan Private Bank, “disinflation is continuing at a rapid pace in Europe—and, importantly, more swiftly than the market or even the ECB’s expectations.”
“Falling inflation and a stagnant economy could justify ECB cuts as soon as the first quarter of next year in our view,” Mr. Landon said.
The euro dropped as much as 0.5 percent against the dollar to $1.0910. On Wednesday it hit its highest level since August at $1.1017.
Markets are now fully pricing in a rate cut from the ECB by April, while around 115 basis points of easing is priced by the end of next year.
ECB policymaker Fabio Panetta said on Thursday the central bank may be able to ease monetary conditions if persistently weak output accelerates the decline in inflation.
Meanwhile, the dollar index, which measures the U.S. currency against six rivals including the euro, rose 0.4 percent to 103.25, picking up after touching 102.46 on Wednesday, its lowest level since Aug. 11.
The index is still down around 3.2 percent in November, its biggest monthly fall since last November, on growing expectations the Fed will also cut interest rates in the first half of 2024.
“The key drivers in November for the dollar weakness have been the benign inflation data and the loosening signs of the labour market,” said Mohamad Al-Saraf, associate, FX and rates strategy at Danske Bank.
“The notion of a soft landing has increased and usually that’s a bad environment for the dollar.”
Investors will be all ears on Friday when Fed Chair Jerome Powell takes centre stage in the wake of Fed Governor Christopher Waller on Tuesday flagging a possible rate cut in the months ahead. It will also be the last time Fed policymakers will be able to share their views before they enter the quiet period before the December policy meeting.
Before that, the spotlight will firmly be on Thursday’s crucial personal consumption expenditure (PCE) price index—the Fed’s targeted measure of inflation.
Christopher Wong, currency strategist at OCBC, said the data will offer a glimpse into whether the disinflation trend seen so far remains intact.
“If core PCE undershoots expectations to the downside, then USD may extend the move lower again,” he said.
U.S. rates futures markets are now pricing in more than 100 bps of rate cuts next year starting in May, and the two-year Treasury yield is close to its lowest since July—it has slumped about 30 bps this week alone.
Meanwhile, expectations that the Bank of Japan will soon end its negative rate policy have pulled the yen up from the depths, and in the process, eased pressure on the central bank to support the currency via direct FX market intervention.
On Thursday, the yen weakened 0.17 percent to 147.485 per dollar, but remains close to the two-and-a-half-month high of 146.675 per dollar it touched on Wednesday. The Japanese currency has firmed almost 3 percent against the dollar in November and is on course for its strongest month this year.
Bank of Japan board member Toyoaki Nakamura said on Thursday the central bank will likely need some more time before phasing out its massive stimulus.
Sterling was last at $1.2646, down 0.39 percent on the day, while the Australian dollar fell 0.1 percent to $0.6610. It’s still up 4.3 percent in November—its steepest one-month gain in a year.
