Eurozone Inflation Dips to 1.9%, Cementing ECB Rate Cut Bets

Inflation in the Eurozone explicitly cooled in December, providing the European Central Bank (ECB) with the green light to proceed with monetary easing. Data from Eurostat showed the Harmonized Index of Consumer Prices (HICP) fell to 1.9% year-on-year, down from 2.1% in November, officially moving below the ECB's2% target ceiling.

Energy Drags, Services Persist

The disinflationary trend was primarily driven by falling energy costs, which subtracted 0.18 percentage points from the headline figure. This decline offset the more stubborn components of the inflation basket.

However, policymakers remain cautious regarding the “stickiness” of underlying price pressures:

• Services Inflation: This sector remains the primary engine of price growth, contributing +1.54 percentage points to the index with a year-on-year rise of 3.4%. High labor costs and resilient demand in tourism and dining are keeping service prices elevated.
• Core Inflation: Excluding volatile energy and food, core inflation stood at 2.3%, suggesting that while the headline number is perfect, the underlying trend is still slightly above target.

Policy Implications for the Euro

The data solidifies the market consensus that the ECB will cut rates in 2025. However, the divergence between headline and core metrics suggests the ECB may avoid aggressive cuts, opting instead for a “data-dependent” gradual path.

For the EUR/USD pair, the confirmation of sub-2% inflation acts as a fundamental drag. With the US economy showing relative resilience and trade war risks emerging, the interest rate differential trajectory continues to favor the Greenback over the single currency.