Eurozone inflation returns to the central bank's target range.

The euro has weakened significantly, hitting a two-year low and declining nearly 6% in 2024, driven by divergent monetary policy expectations between the European Central Bank (ECB) and the U.S. Federal Reserve. Meanwhile, investors are reassessing recent central bank meetings and adjusting expectations for interest rate cuts in 2025. Christine Lagarde, President of the ECB, stated that inflation in the Eurozone is returning to the central bank's target range. However, persistently high inflation in the services sector, at 3.9%, remains a key obstacle and challenge that the ECB must carefully consider. At the same time, expectations of only two interest rate cuts by the Federal Reserve in 2025 have strengthened the U.S. dollar sharply.

The ECB has decided to cut interest rates for the fourth time this year. In its most recent meeting, the central bank reduced rates by another 25 basis points, in line with market expectations. This decision reflects a significant deceleration in inflation. The ECB projects that inflation will decline gradually, forecasting 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026. Additionally, core inflation, which excludes volatile food and energy prices, is also expected to decrease, targeting 2% in the medium term.

Nevertheless, the ECB believes that production costs will start to slow down next year due to continued rate cuts. However, there are lingering concerns about borrowing costs, as previous rate hikes continue to impact existing loans. The ECB forecasts slower economic recovery, with growth projections of 0.7% in 2024, 1.1% in 2025, and 1.4% in 2026.

The Eurozone's manufacturing PMI stood at 45.2 in December, remaining stable compared to the previous month, signaling a continuous contraction in manufacturing activities for two consecutive years. New orders have steadily declined, forcing factories to cut production compared to the same period last year. This decline has also reduced capacity demand, prompting manufacturers to cut jobs, especially in Germany and France, where economic recession signs are evident. On the pricing front, production costs have decreased at the slowest rate in four months.

Meanwhile, the services PMI rose to 51.4 in December from 49.5 in November, surpassing analysts' expectations of 49.5. The latest figures indicate a return to expansion in the services sector after its first contraction in ten months in November. However, new orders continue to decline, resulting in stable employment levels, while production costs remain elevated due to persistent demand growth.

The Eurozone's trade surplus stood at €6.8 billion in October, down from €9.4 billion a year earlier. Imports in the Eurozone rose 3.2% to €247.2 billion, while exports increased 2.1% to €254 billion. This aligns with recent concerns about slowing manufacturing activity in the major economies of the Eurozone. Most of the Eurozone's exports continue to be chemicals, while energy-related goods, machinery, and vehicles show a continuing downward trend.