Euro area inflation too low, EUR too high

Longer-term inflation expectations dropped again after the ECB meeting, and the most recent flash estimate of core HICP inflation disappointed significantly and should be confirmed on Wednesday at 0.9% y/y (versus initial expectations for 1.1%).

"We revised our near-term EURUSD forecasts higher last week, we think the ECB's rhetoric at the December meeting comes at a longer-term cost to the EUR and continue to forecast 0.95 by end-2016', notes Barclays.

The euro area flash composite PMI (Wednesday) is likely to remain unchanged at 54.2 in December (consensus: 54.2), with a minor drop in manufacturing offset by a slight uptick in services confidence (52.7, consensus: 52.8, and 54.3, consensus: 54.0, respectively). 

We should see some improvement in German confidence, while French PMIs are expected to edge down, mainly on a weaker services sector following the Paris terrorist attacks. The December German IFO business climate index (Thursday) may also gain attention, but the market expects it to remain unchanged at 109.0.