The Euro got a boost following the flash PMIs last week which were above expectations. Albeit, the expectations were for continued contraction, and the results point to contraction. Just that the downward slope isn’t as bad as initially feared. Investors were more immediately betting that the ECB would be under less pressure to raise rates.

But that optimistic outlook for the Euro could face some challenges with the release of the more important flash CPI figures for November. Of course they could be revised later, but the preliminary look at inflation typically sets the tone for the markets – and expectations for the ECB ahead of its December meeting.

What the Markets are Looking For

The consensus among economists is that inflation continued its decline over the last month, with the headline figure falling faster than the core. While the headlines will likely focus on the lower CPI change, markets are likely to pick up more on the core rate that is tracked more closely by the ECB.

The inflation news cycle kicks off on Wednesday, when each of the German states report their inflation numbers. Usually by the time Hesse reports, the market has a pretty good idea how the larger figure for Germany will turn out. That’s why the price action could happen before the full number is released. A similar phenomenon happens for the whole of the EuroZone. The market typically has a good idea of how the data will turn out by the time Spain, Germany and France (in that order) have reported.

The Numbers to Beat

Germany is expected to see its inflation rate drop to 3.4% from 3.8% prior. This is the headline number, since European countries don’t report core. Given the outperformance in PMIs for the same period, there is a higher chance that Germany’s inflation could come in above expectations. But slower German inflation would raise the prospect of the ECB cutting sooner than currently expected, which could weaken the Euro.

The next day, France is expected to report a drop in its inflation to 3.7% from 4.0%. Slowing demand in its PMIs indicate that price pressures might be lower, and provide an opportunity for a miss. If German and French CPI point in opposite directions, it means the market could wait until the number for the whole shared economy comes out. Eurozone CPI is expected at 2.7%, down from the 2.9% prior. But the core is likely to remain more sticky, as usual, coming down to 4.1% compared to 4.2% prior.

Potential Market Takeaways

Core inflation is expected to more than double the ECB’s target, which likely implies that there won’t be any talk from central bank officials about easing. However, traders might be looking more closely at the demand issue.

The PMI figures last week showed slowing demand among European purchasers, which could indicate slower headline inflation. That would be a sign of slowing economic dynamism as opposed to just inflation coming down. The ECB might come under strong pressure to move towards easing if the European economy follows Germany into a recession and shows signs that it won’t recover soon.

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