Eurozone inflation surprised marginally to the upside in October, with headline price growth rebounding to 2.0% YoY.
This, together with better-than-expected GDP readings across the bloc published earlier in the week, should be enough to kill off risks that the ECB cuts rates by 50bps in December. That said, underlying price pressures continue to ease, which should be enough to see the Governing Council continue to deliver a succession of 25bp cuts over coming meetings.
We still look for rate cuts at every decision through to June 2025, implying a policy rate of 2.0% by the middle of next year.
Admittedly, this latest set of price growth figures does show a notable rise, one that could look alarming at first glance. Inflation had been tracking at 1.7% YoY in September. That said, an uptick had been widely anticipated across markets due to the impact of energy base effects. Adjusting for this, and the impact of other volatile components, core inflation stabilised at 2.7% YoY in October. While modestly above the ECB’s target, this is still low enough for the Governing Council to continue easing rates, given a view that disinflation pressures remain in the pipeline.
For markets, the impact of today’s overshoot has been relatively muted. ECB rate cut expectations continue to see only limited odds of a 50bp cut in December, with a 25bp move the base case.
From an FX perspective, the lack of movement in rate expectations has seen a similarly limited EURUSD response, with the focus now moving to tomorrow’s US jobs report for the next major risk event for the pair.
This content was originally published by our partners at Monex Europe.