Morning Note: Eurozone Inflation Surge Pressures ECB Policy Decisions

Eurozone Inflation Hits 2.4%, ECB Faces Policy Challenges

The Eurozone's inflation rate increased to 2.4% in December from 2.2% in November, which aligned with expectations. This was mainly driven by rising energy prices and services sector costs. Core inflation, a critical indicator of the sustainability of price growth, remained high. This could strengthen the European Central Bank's (ECB) stance of adopting a cautious approach to easing policy restrictions in the coming months.

(Eurozone’s Inflation Chart, Source: Eurostat)

Although inflation has risen and is now close to the ECB’s 2% target, upcoming data may remain volatile. Nonetheless, it is expected to decline gradually in the medium to long term and eventually achieve the ECB’s inflation target.

From the four-hour time frame of technical analysis, the price of EUR/USD is moving within a bearish channel, as indicated by the lower highs and lower lows. It was rejected by the resistance of the bearish channel, broke through the first rectangular support zone, and is now retesting the second rectangular support zone. If this support zone fails to hold, the price will likely decline.

(EUR/USD H4 Price Chart, Source: Markets.com)

Australia's Inflation Rises to 2.3% 

Monthly consumer price index data from the Australian Bureau of Statistics on Wednesday showed its measure rose at an annual pace of 1.2%, up from 1% in October's data and just above the market forecast of 2.3%. Consumer price inflation crept higher from three-year lows in November, with an electricity price spike, yet a moderating core still supports the case for a cut in interest rates as soon as next month. 

(Australia CPI y/y Chart, Source: Australian Bureau of Statistics)

More importantly, the trimmed mean, a key measure of core inflation, fell to an annual 3.2% from 3.5%, now close to the Reserve Bank of Australia’s target band of 2% to 3%. Corporate profits have been up for the past year on the back of rising consumer demand. The central bank has left rates unchanged for over a year, deeming the current cash rate of 4.35%, a climb from a record-low 0.1% during the pandemic, restrictive enough for inflation to return to its target band without costing jobs.

From the technical analysis perspective, the price has recently broken through the red bearish channel with significant bullish momentum. Following this, it faced temporary rejection, retested the broken bearish structure, and surged upwards again. However, it was rejected again by the previous fresh resistance, leading to a solid formation of a double top. Currently, the price might be retesting the broken bullish structure, and it might continue its bearish movement if the price fails to break through the blue rectangular resistance zone.

(AUD/USD H4 Price Chart, Markets.com)

GBP/USD Poised for Fresh Bearish Move

An unexpected downward revision to GDP data for the UK’s third quarter, alongside news that three Bank of England Monetary Policy Committee (MPC) members voted at December's meeting for an immediate rate cut, reopened debate about how growth and inflation risk might guide the BoE in a 2024 policy error.

Even as inflation risks have softened across most of Europe, UK inflation in services has proved persistently elevated. Still, traders expect the Bank of England to cut interest rates by about 56 basis points (bps) this year, a shade less than before/late last week. The BoE has already cut rates to 4.75% from 5.25% in 2024, a reduction of 50 bps.

In terms of price action analysis, the price has been rejected from the bearish channel resistance, gained significant bearish momentum, and broken through the bullish structure. Currently, it seems like it’s forming a bearish correction with minimal volume and is about to retest the blue rectangular zone. If the price fails to break through this zone, it is highly likely to continue its bearish movement.

(GBP/USD H4 Price Chart, Source: Markets.com)

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.