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Summary: Eurozone inflation has slowed more than expected in November, with the target of 2% possibly being achieved, boosting expectations of a rate cut by the European Central Bank. The Euro accelerated its decline against the US dollar, reaching 1.0900.

Fundamentals

In November, the Eurozone Consumer Price Index (CPI) significantly slowed from 2.9% to 2.4%, below the expected 2.7%. Core CPI (excluding energy, food, alcohol, and tobacco) slowed from 4.2% to a year-on-year 3.6%, below the expected 3.9%.

Looking at the major components, food and tobacco are expected to have the highest annual rate in November (6.9%, compared to 7.4% in October), followed by the services sector (4.0%, compared to 4.6% in October), non-energy industrial goods (2.9%, compared to 3.5% in October), and energy (-11.5%, compared to -11.2% in October).

As investors increase bets on an early rate cut by the European Central Bank, Eurozone inflation has cooled more than expected, making the 2% target achievable.

In terms of the market, influenced by the decline in energy prices, the Eurozone's inflation in November saw a significant decrease beyond expectations, with the preliminary annual rate recorded at 2.4%, lower than the previous month's 2.9%. This brings it closer to the target set by the ECB.

Observations of sub-indicators reveal that price pressures in almost all categories are continuously easing, staying at their lowest points in two years. A core indicator excluding fuel and food has slowed for the fourth consecutive month to 3.6%. However, output is also declining, with a 0.1% contraction in GDP in the third quarter, leaving the region on the edge of recession.

Data earlier in the week showed these trends unfolding in France, prompting currency markets to bet on the ECB cutting rates ahead of schedule. This suggests that overall interest rates are moving towards the ECB's 2% inflation target, almost confirming the end of the unprecedented rate-hiking cycle. However, ECB officials insist that monetary policy must remain tight to ensure the inflation rate returns to 2%.

Technical Analysis

Since reaching a low of 1.0447 on October 3, the EURUSD has been in a recovery mode. However, as expected, bulls faced significant resistance at the 1.1000 level, and an overbought condition appeared in the daily chart, prompting investors to take profits. The EURUSD accelerated its decline towards the 1.0900 level.

Currently, the market is undergoing consolidation. If buying pressure continues, bulls may re-enter the recent selling zone around the 1.0980 range and then revert to a downtrend. Bearish behavior could lead to further price declines, testing support at 1.0832 from June to July. Breaking below this area may set the foundation for a move towards 1.0765, a level that served as both support and resistance in September. If unable to hold here, the asset may resume its downward trend to 1.0693 before recovering to the May low of 1.0634.

On the other hand, bulls are likely to rekindle the upward trend after surpassing the 1.0983 level. Following that, the asset could rise to the February peak of 1.1032. If this resistance level also fails to provide a barrier, attention may shift to the 1.1094 level, which held strong three times in April.

Overall, despite facing recent setbacks, the EURUSD remains robust. However, we believe that the recent high of 1.0172 may have become a structural high, and as long as the 1.0983 level prevents further upside, the asset is poised for a structural downtrend. In terms of trading, going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 1.0957

Target Price: 1.0675

Stop Loss: 1.0172

Valid Until: 2023-12-14 23:55:00

Support: 1.1000, 1.1017, 1.1065, 1.1080

Resistance: 1.0959, 1.0926, 1.0882, 1.0852