Euro-zone inflation preview: Warm welcome for Lagarde? EUR/USD may rise

  • Economists expect higher inflation figures in the euro area in November.
  • The figures feed into the ECB's internal battle as Christine Lagarde takes the helm.
  • EUR/USD is set to move in response to any outcome. 

The battle for influence at the European Central Bank – the "only game in town" in the euro-zone – depends on the data. An increase in the monthly Consumer Price Index may embolden the hawks in their battle against loose monetary policy.

Headline CPI is set to bounce from October's 0.7% yearly – the lowest since 2016 – to 0.9% in November. That would still leave inflation well below the official ECB target of "2% or close to 2%" annual price increases.

Focus on core inflation

While the bank officially only targets overall CPI, the focus has been shifting to Core CPI – excluding volatile factors such as energy. Underlying inflation has been encouraging, reaching 1.1% in October, and is now forecast to accelerate to 1.2%.

Moreover, an increase to 1.2% would place Core CPI at the highest since May and at just below the top of the recent range. Underlying price hit a high of 1.3% six months ago and beforehand in 2017. A surge to 1.4% would already represent the fastest core price increase since 2013. 

Euro zone core CPI 2012 2019 development

Core prices, the hawks, and Lagarde

A steady rise in less volatile items could potentially push headline inflation higher once energy prices move higher. It would also show that economic growth and wage growth are rising at a sufficient pace to push inflation higher.

And such a rise would also provide ammunition for the hawks.

ECB members from Germany and other northern countries disapproved of the former bank's president Mario Draghi's push for looser policy. In his penultimate meeting in September, he rammed through a rate cut and restarted the bank's bond-buying scheme or Quantitative Easing

The ECB expands its balance sheet by €20 billion a month in newly created money, that devalues the common currency. The hawks would like to prevent an expansion of the plan and potentially to reverse it, leading to a revaluation of the euro

They have come out in public and called for a full review of the Frankfurt-based institution's policies. One member, Sabine Lautenschläger, has even quit her post. However, the doves, support a more accommodative policy, have been fighting back and suggesting that more could be done. 

The public struggle is not only related to the new policies but also for the ears of Christine Lagarde, the new President of the ECB. She has made two public speeches and has also convened an off-site meeting of the ECB, but has yet to lay out her policy.

The bank's next decision is on December 12, when it will also publish new quarterly forecasts – making November's CPI figures critical for that call. 

Three Core CPI and EUR/USD scenarios

1) Within expectations: If Core CPI comes out at 1.2% as estimated, the common currency has room to rise. As mentioned earlier, that would be the highest since May and would limit any further easing. 

EUR/USD may advance higher, albeit at a moderate pace. This scenario has a high probability.

2) Below expectations: Despite the recent upticks, Core CPI has disappointed over the years, and the upcoming publication may be no different. An unchanged figure of 1.1% or worse would weaken the hawks' case and undermine the euro.

This scenario has a medium probability.

3) Above expectations: The chances are low, but matching the six-year high of 1.3% is only 0.1% from expectations and cannot be ruled out. It would send the common currency substantially higher, but the chances are low.


November's inflation figures are of high importance amid the growing conflict within the ECB about future policy and the change at the top. An "as-expected" result may be enough to push the euro higher while any miss may weigh. An unlikely beat of early projections would already propel it to higher ground.

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