Eurozone inflation data for December showed a 0.4% month on month increase in CPI, while core inflation remained stable at 2.7% year-on-year. The rebound in energy prices and high inflation in the service industry are putting pressure on the economy. The rise in crude oil prices has slowed down, and natural gas prices have fallen, but the pressure on gas storage will increase in the future. The short-term volatility of the euro against the US dollar has intensified, and it may rebound in the medium term with economic recovery.

Eurozone inflation data: CPI up 0.4% month on month, core inflation stable

According to the latest data released by the European Statistical Office (Eurostat), the Eurozone's Harmonized Consumer Price Index (HICP) rose 2.4% year-on-year in December, higher than November's 2.2% and in line with market expectations. The core HICP increased by 2.7% year-on-year, unchanged from November and in line with expectations. On a month on month basis, HICP rebounded by 0.4% in December compared to November, while core HICP rose by 0.5%, higher than November's -0.6%.

In terms of specific composition, the annualized inflation rate of the service industry is the highest, at 4.0% (3.9% in November); Next are food, alcohol, and tobacco (2.7%, unchanged from November), non energy industrial products (0.5%, lower than November's 0.6%), and energy inflation rate of 0.1%, significantly higher than November's -2.0%.

The rise in crude oil prices has slowed down, while natural gas prices in Europe have fallen

Although crude oil prices have risen recently, their upward trend is beginning to weaken. Yesterday, ICE Brent crude oil prices fell slightly by 0.27%, but remained above $76 per barrel. OPEC+had previously decided to extend its production reduction policy, and Saudi Arabia has also raised the official selling price (OSP) of Arab light crude oil shipped to Asia in February. Nevertheless, the overall supply and demand situation is expected to remain loose in 2025, which may limit the upward potential of oil prices.

The European natural gas market showed a downward trend, with TTF natural gas prices falling more than 4.6% yesterday, closing at 47.33 euros per megawatt hour, lower than last week's 50 euros per megawatt hour. The reasons behind this trend include the complete cessation of natural gas transmission from Russia through Ukrainian pipelines, as well as speculators beginning to reduce their previously accumulated long positions. Although the current gas storage capacity has decreased to 70% of the lowest level since the same period in 2022 due to winter demand, the overall reserves are still relatively sufficient. However, the pressure of gas storage replenishment faced by the EU this year will be significantly higher than last year.

Mainland European stock indices are strong, while the FTSE index in the UK is lagging behind

In early European trading today, major stock indices on the European continent performed strongly, while the FTSE 100 index in the UK lagged behind. The main reason for the decline in the FTSE index is the drop in stock prices of banks and housing construction companies, which is closely related to the news of the first decline in UK housing prices in nine months. Although the market had previously expected a significant decrease in UK interest rates this year, inflation concerns have limited the extent of the decline in mortgage rates. At the same time, many predict a favorable phase for economic growth in the coming years, but the outlook for the UK economy remains uncertain due to recent plans by businesses to lay off employees and raise prices due to tax increases.

EUR/USD: Inflation Data and Market Dynamics Impact

Due to mixed inflation data in the Eurozone, the EUR/USD exchange rate is under pressure in the short term. As of the time of writing this article, the euro to dollar exchange rate has fallen to 1.0410, but it is still rising by about 0.20%. Data from the foreign exchange options market shows that since September last year, investors' concerns about the correction of the euro against the US dollar have reached a new high, indicating that the market's attention to the short-term trend of the euro continues to rise.

Future prospects

On the one hand, stable core inflation indicates that the economic fundamentals are resilient, but fluctuations in service and energy prices may put pressure on future inflation paths. Although there is a downward trend in overall inflation in the eurozone, high core inflation may prompt the European Central Bank to maintain a relatively tight monetary policy. In addition, changes in the energy market will continue to affect the stability of the regional economy, especially the issue of natural gas supply, which may exacerbate tensions in the future gas storage and replenishment season.

On the other hand, the external environment has become increasingly complex in its impact on the eurozone economy, with key variables including the trend of the US dollar, geopolitical risks, and uncertainty in the global demand outlook. Analysts predict that the euro dollar exchange rate will experience increased volatility in the short term, but may gradually rebound in the medium term driven by stable economic recovery signals. Meanwhile, the improvement of corporate investment and consumer confidence still relies on more relaxed fiscal policy support.