The euro gained strength as robust inflation data and improved European PMI readings for late February bolstered confidence in the currency. The European Central Bank (ECB) is poised to make a key decision later this week, with expectations of a further rate cut amid a cautious economic landscape. Although eurozone inflation exceeded expectations, it has shown signs of slowing compared to the previous month, prompting a nuanced approach from policymakers.
Recent data revealed that the core price index, excluding volatile goods, dipped to 2.6%, its lowest level since early 2022. Meanwhile, the headline Consumer Price Index (CPI) declined to 2.4%, down from a peak of 2.5%. Despite this decline, the rate remains significantly higher than September's 1.7% year-on-year figure, indicating persistent inflationary pressures within the eurozone.
Since last September, the ECB has slashed its key interest rate by 160 basis points in an effort to stimulate the economy. The central bank is contemplating an additional quarter-point cut this Thursday to further support recovery. However, given the complexity of the current economic environment, a more cautious approach may be warranted moving forward.
The eurozone economy has responded positively to monetary easing and the depreciation of the euro observed since late 2024. These factors have contributed to maintaining inflation around 2.4% over the past 17 months. However, the ECB continues to target an inflation rate of "around 1.8%," necessitating ongoing adjustments in monetary policy.
Weak domestic demand in Europe poses minimal inflationary threats, providing some reassurance to the ECB as it navigates its policy decisions. Nonetheless, the potential appreciation of the euro could influence future actions by the central bank, as currency fluctuations play a critical role in shaping economic outcomes.