Decrease in crude oil and euro after inflation data

Yesterday, the euro lost after inflation data showed a further slowdown in price growth. EUR / USD exchange rate fell below 1,09. So far, we have a downward correction on the main currency pair, the size of which is moderate for now. In turn, crude oil was significantly depreciated because the market was disappointed with yesterday's OPEC+ decision. WTI fell to USD 75,5 per barrel.

A clear drop in inflation

In the euro zone, inflation fell by 0,5 percentage points in November to 2,4 percent, which was a much stronger decline than expected. Particularly surprising was the sharp decline in the inflation rate for services. Core inflation dropped even from 4,2%. up to 3,6 percent..

November rate inflation probably marks a temporary low. In December, the HICP is likely to exceed 3% again if the sharp decline in energy prices in December (-6,6% m/m) is excluded from the year-on-year comparison. In January, the expiry of the lower VAT rate on natural gas and the higher CO2 price in Germany will prevent the inflation rate from falling sharply.

A key factor for the rest of the year will be when companies pass on the recent surge in labor costs to their customers. Weak demand suggests this will happen later rather than sooner.

Yesterday's price data is likely to fuel speculation that the ECB will soon cut its main interest rate. The market completely rejects the possibility of any increases.

The cycle of tightening has not ended?

As a result of these publications, the euro lost and the EUR/USD rate dropped to 1,0880. The downward correction reached the first internal retracement FIBO 23,6 percent and so far a local hole has been marked there. Additional drops prompted a hawkish comment from Fed's Mary Daly, which said it was still too early to conclude that the Fed had ended its monetary tightening cycle. The Federal Reserve's preferred measure of inflation (PCE, PCE core) was lower than the previous value but was in line with the consensus, which is why the results caused the dollar to gain in value in the afternoon.

It was interesting on the oil market yesterday. Investors expected OPEC+'s decision on setting production limits for 2024. The meeting was postponed from November 26 to 30. The extended cartel issued a statement on Thursday saying did not formally support production cuts, but individual countries have announced voluntary reductions totaling 2,2 million barrels per day in the first quarter of 2024. Saudi Arabia will continue its unilateral cut of 1 million barrels per day in January-March.

The drop in oil prices apparently suggests that the market is not convinced of lower supply in the face of forecasts of lower demand in 2024. Hence, the significant reduction in the price of the raw material resulted. Prices have been rising since the beginning of the week, but yesterday's session brought a complete reduction in these gains.

Source: Łukasz Zembik, OANDA TMS Brokers