The euro slipped on Thursday after European union inflation eased more than expected this month, driving the likelihood of an ECB rate cut, while the US dollar continued to strengthen from a three-month low.
Consumer price growth in the 20 countries that share the euro currency fell to 2.4% in November from 2.9% in October, missing expectations for a decline to 2.7%.
"The message from today's European CPI data is clear," said Matthew Landon, global market strategy officer at J.P. Morgan Private Bank. "Disinflation continues apace in Europe and, importantly, faster than the market or the ECB expected."
"Decreasing inflation and a slowing economy could allow for an ECB rate cut as early as the first quarter of next year in our view," Landon said.
The euro lost 0.53% against the US dollar to $1.0909. On Wednesday, it hit its highest level since August at $1.1017.
Markets are now fully pricing in a rate cut by the ECB by April, while around 115 basis points of cuts are expected by the end of next year.
ECB official Fabio Panetta said on Thursday that the central bank may ease monetary conditions if persistently weak output accelerates the decline in inflation.
Meanwhile, the US dollar index, which measures the US currency against six other currencies including the euro, strengthened 0.65% to 103.335, recovering after touching 102.46 on Wednesday, its lowest level since August 11.
The Personal Expenditure Index (PCE) only registered 3% annual growth in the month, down from 3.4% in September and in line with expectations.
"Core" PCE, which excludes volatile food and energy categories, also recorded growth of 3.5%, down from 3.7% from the previous month and in line with what economists in a Bloomberg survey had expected.
On the other hand, there are expectations that the Bank of Japan will soon end its negative rate policy and thus it relieves the pressure on the central bank to support the currency through direct FX market intervention.
Bank of Japan Board member Toyoaki Nakamura said on Thursday that the central bank may need more time before ending its massive stimulus program.
Sterling lost 0.55% to trade at 1.2624 against the US dollar. The Australian currency also fell by 0.37% to $0.6593.
