Euro Weakens as Weak French Data Fuels Rate Cut Speculation

The euro faced a decline and German government bonds experienced an upswing following disappointing French economic data, intensifying speculations about potential rate cuts by the European Central Bank (ECB).

The euro exhibited a 0.4% weakening against the dollar while ten-year bund yields dropped four basis points, indicating growing anticipation of an earlier initiation of ECB interest-rate reductions in the coming year.

The Stoxx 600 index slightly receded, marking a moderate adjustment to its most impressive month since January. Concurrently, US equity futures maintained stability with minimal changes.

US Treasuries, however, experienced a brief pause in their November rally as investors awaited further signals regarding the potential timing of a shift towards rate cuts in the upcoming year.

The upcoming data on Thursday is projected to demonstrate a deceleration in the personal consumption expenditures price index, the Federal Reserve’s preferred inflation metric.

“The PCE inflation data for October is most likely going to echo what we already saw in the October CPI and PPI reports and add to the soft-landing narrative,” stated Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho International Plc in London.

The French economy contracted by 0.1%, coupled with a decline in November inflation to the lowest level this year.

Markets are now pricing in a quarter-point reduction in ECB rates by April.

Investors are closely watching for signals from Fed Chair Jerome Powell’s speech on Friday, considering it a potential litmus test for market sentiment and the Fed’s stance on monetary policy.

Analysts caution against excessive optimism in the market, urging prudence in evaluating the forward curve and expecting clarity from Powell’s statements later this week.