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The EURUSD has gained over the last couple of days amid dollar weakness. Markets are once again moving to price in a high chance that the Fed will cut rates in December. Meanwhile, there is a pretty solid consensus that the ECB will hold once again. This narrowing of the interest rate gap is expected to support the Euro amid weakness in the greenback.

However, those forecasts rely on the current economic situation remaining in check. Particularly the European CPI, which has been near the ECB’s 2.0% since the summer. But, over the last couple of months, it has been slightly above target. And there has been some concern that services inflation in the share economy is running a little hot. This means that traders would likely be keeping a close eye on the evolution of the inflation rate.
 

Economists See No ECB Cuts For a Year

In a recent economist poll conducted by Reuters, nearly all said they expected the ECB to keep rates unchanged at the upcoming December monetary policy meeting. Around two thirds went further to suggest that the ECB will hold rates at 2.0% for the entirety of 2026. The dissenters expected the ECB to potentially ease one more time next year.

These projections are based on an expectation that inflation will remain near the target rate, and that the economy will continue to grow slowly but steadily. These sentiments are generally echoed by ECB policymakers. Last week, the usually hawkish Dutch and Irish MPC members copied President Christine Lagarde’s line of inflation and interest rates being “in a good place”. Although they did express concern about services inflation and food prices.
 

What to Look Out For

On Friday, the three largest economies in Europe will report their flash CPI figures for November, giving markets some insight on what to expect from the full number that will be published on Tuesday. First up is France, where inflation is expected to accelerate to 1.1% from 0.9% in October. A similar pattern is projected for Germany, with inflation seen rising to 2.4% from 2.3% prior. Italian inflation is anticipated to step up to 1.4% from 1.2%.

If those readings come in as expected, then the market might not react to the Tuesday CPI figure unless there is a significant surprise. The consensus among analysts is that Eurozone Flash November CPI will remain unchanged at 2.1%. The core rate, which strips out more volatile energy and food prices, is expected to step up to 2.4% from 2.3% prior.
 

Clouds on the Horizon

Economists expect inflation to tick lower at the start of next year, amid slow economic growth. GDP for the shared economy is expected to grow at just 1.1% in 2026 compared to 1.4% forecast for this year. There is a correlation between economic activity and inflation, and a slowdown in the economy usually translates into  slower inflation.

With expectations that Europe’s economy will be slower in the first quarter of next year, the ECB will be under pressure not to raise rates. But those projections could change if inflation were to rise above target. For now, markets are pricing in a dovish bias for the ECB, compared to the Fed, which is expected to cut. But stronger inflation could eliminate the central bank’s dovish bias and provide some tailwinds for EURUSD.

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