The Eurozone’s Core Harmonized Index of Consumer Prices dropped by 0.5% in November. This decline sheds light on trends in consumer prices and hints at the current economic climate. The USD/CAD saw a small drop, affected by year-end market activities. However, gold prices rose due to a dovish Federal Reserve outlook, which balanced out the strength of the US Dollar.

USD Gains Strength as Eurozone Weakens

The USD strengthened because of holiday trading and issues with Venezuelan oil supply. The EUR/USD pair fell toward 1.1700 as the USD gained traction, although expectations of a hawkish ECB may limit further declines. GBP/USD also faced challenges, trading below 1.3350 after UK inflation figures disappointed. Despite the USD’s recovery, gold held steady above $4,300, supported by cautious market sentiment. Bitcoin may face further corrections, trading near a key support level just below $87,000. A drop below this level could signal more declines. AAVE continued to decline, trading under $186 amidst negative market signals. The end of the SEC investigation did not change the downward trend. Central banks are showing caution in their monetary policies, with the Fed easing for the third consecutive meeting. Other major banks are also evaluating their strategies, which will continue to influence economic expectations.

Challenges with Eurozone Inflation

The core inflation rate for the Eurozone in November was negative 0.5%, a surprising sign of deflation. This puts pressure on the European Central Bank to adopt a more cautious approach in upcoming meetings. As a result, the EUR/USD pair is struggling around 1.1700. In the past, we observed similar disinflationary trends throughout 2024, but this recent drop is more significant. The latest data makes it unlikely that the ECB will meet its 2% annual inflation target anytime soon, increasing the likelihood of rate cuts in early 2026. Earlier Eurostat figures showed annual inflation barely above 2.2%, making this negative monthly report particularly significant. Conversely, statements from the Federal Reserve indicate there is no rush to cut interest rates. Fed Governor Waller noted that the US economy can handle higher rates for a while longer. This difference in policy is a key reason the dollar has strengthened recently. Recent US Core PCE data has remained stubbornly above the target, around 2.5% over the last quarter, giving the Fed a reason to maintain its current stance. We observed a similar scenario in 2024 where persistent inflation delayed expectations for rate cuts. This suggests the dollar is likely to strengthen further against the euro. The UK situation mirrors that of the Eurozone, with annual inflation coming in at 3.2%, missing expectations. This has weakened the pound, indicating the Bank of England might need to adopt a more cautious approach. Consequently, GBP/USD is trading heavily below the 1.3350 mark. For derivatives traders, this creates a clear opportunity. We recommend buying put options on EUR/USD and GBP/USD to capitalize on the weaker European currencies while managing potential risks of unexpected reversals. Despite the strong dollar, gold prices remain above $4,300, indicating underlying caution in the market. Historically, like in the uncertainty of 2022, gold has served as a safe-haven asset even when the dollar is strong. Traders may consider using call options on gold as a hedge against overall market volatility. The weakness in more speculative assets like Bitcoin, which struggles below $87,000 amid ETF outflows, further reflects this risk-averse sentiment. It suggests a shift away from high-risk assets into safer options, reinforcing the cautious stance seen throughout the market. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now