ECB expected to cut interest rates by 25 bps.

The euro has remained stable since last week despite political turmoil in France and the upcoming monetary policy decisions by the European Central Bank (ECB). Investors anticipate that the ECB will reduce its interest rate by 25 basis points (bps) next week, marking the fourth cut this year. The move aims to curb inflation and steer the policy rate closer to a neutral level of approximately 2%.

ECB President Christine Lagarde has expressed that the central bank may need to proceed cautiously with further rate cuts, closely monitoring risks based on economic data within the eurozone. The goal is to ensure inflation aligns with the 2% target. However, investors predict that the ECB will reduce rates by an additional 125 bps by mid-2025. In contrast, the Federal Reserve is expected to make only minor rate cuts, supported by robust employment data, which indicates the resilience of the U.S. economy.

Inflation in the eurozone rose to 2.3% in November, up from 2% in October, marking the second consecutive monthly increase, in line with market expectations. This rise towards the end of the year is attributed to the base effect of last year’s sharp decline in energy prices. Additionally, industrial goods prices increased by 0.7%. However, service sector inflation slightly declined to 3.9%, driven by a modest slowdown in food and beverage prices. Core inflation, excluding volatile food and energy prices, remained steady at 2.7%, the same as the previous month.

The eurozone construction sector’s PMI dropped to 42.7 in November, down from 43 in October, signaling a continued and pronounced contraction. The decline is attributed to a sharp slowdown in new orders, forcing companies to reintroduce layoffs. Simultaneously, purchases of raw materials and contractor services have significantly decreased. Germany and France remain the most affected, with noticeable declines in construction activity.

The euro area’s Producer Price Index (PPI) fell by 3.2% year-on-year in October, slightly better than the anticipated 3.3% drop. This decline was largely driven by a more than 11.2% reduction in energy prices, while intermediate goods costs (used in manufacturing finished goods) eased slightly by 0.5%. The drop in PPI directly impacts inflation, suggesting a potential slowdown in future inflationary trends. However, energy and goods costs remain critical factors, forcing companies to pass on higher costs to consumers, which could drive inflation back up.

The eurozone Composite PMI rose slightly to 48.3 in November. Despite the uptick, the index continues to reflect contraction in private sector activity, with the fastest decline since January. The services sector contracted for the first time in 10 months, while manufacturing activity continued to decelerate sharply. Weak demand remains the primary driver of the slowdown, evidenced by six consecutive months of declining new orders. Additionally, export sales have significantly decreased, leading to a drop in business confidence to its lowest level in 12 months.