The November estimate of CPI was in line with expectations at 0.3% on an annualised rate. The core rate was 0.7%, also in-line with expectations. The EUR has staged a mini- recovery on the back of this data as there was some risk that CPI could miss expectations after German CPI fell to its lowest level for nearly 5 years.
Although EURUSD is managing to retrace some of its earlier weakness, deflation is still a threat for the currency bloc, and OPEC did the ECB no favours on Thursday when it decided not to cut production levels. Since the announcement, Brent crude has tumbled $7 per barrel, and we could slip below $70 in the coming days (WTI is already at $68).
The ECB needs to decide if it will look through the impact of falling oil prices on the rate of CPI, or if it still feels comfortable to embark on QE. We will find out more at next week’s ECB meeting. We expect EURUSD to trade in its recent range between 1.2350 – 1.2600 with a bearish bias if we fall below 1.24, in the lead up to next week’s meeting. If the ECB doesn’t embark on QE then we could see a more protracted recovery in EURUSD, until then we continue to think the short-term bias is lower.
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