EUR/USD refreshes annual lows as US Dollar extends rally
- EUR/USD sinks to near 1.0530 as the US Dollar extends its rally as Republicans win both houses in the US.
- The US inflation accelerated expectedly in October, which boosted expectations of an interest rate cut in December.
- Investors await Fed Jerome Powell’s speech on Thursday for fresh interest rate guidance.
EUR/USD posts a fresh annual low near 1.0530 in European trading hours and extends its losing streak for the fifth trading day on Thursday. The major currency pair has faced an intense sell-off as the US Dollar (USD) continues to enjoy upside momentum, being one of the major beneficiaries of President-elected Donald Trump’s win in the United States (US) presidential election. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, climbs to near 106.80, the highest level seen since November 1, 2023.
It will be easy for Trump to implement the agenda of lower taxes on businesses and workers, as well as high import tariffs, as Republicans have ensured control of the Senate and the House of Representatives, according to the Associated Press.
An increase in import tariffs would increase the demand for domestically produced goods and services, which would boost inflationary pressures that limit the potential of the Federal Reserve (Fed) to cut interest rates faster and deeper.
The Greenback rose sharply on Wednesday after the release of the US Consumer Price Index (CPI) data for October. The inflation report showed that price pressures grew expectedly on a monthly as well as annual basis, boosting expectations of interest rate cuts in the December meeting. According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 4.25%-4.50% next month increased to 83% from 59% a day before.
In Thursday’s session, investors will pay close attention to Fed Chair Jerome Powell’s commentary in a panel discussion hosted by the Federal Reserve Bank of Dallas at 20:00 GMT. Market participants would like to know his stance on December’s monetary policy decision and the impact of Trump's policies in the medium and longer term.
On the economic front, investors will focus on the US Initial Jobless Claims for the week ending November 8 and the Producer Price Index (PPI) data for October, which will be published at 13:30 GMT.
Daily digest market movers: EUR/USD faces pressure on firm ECB dovish bets
- EUR/USD remains on the backfoot amid Euro’s (EUR) more than a week-long underperformance against its major peers. The Euro faces pressure from Trump’s victory in the US presidential election and the collapse of the three-party coalition government in Germany after Chancellor Olaf Scholz sacked Finance Minister Christian Linder on November 6.
- The implementation of Trump’s tariffs on the Eurozone is expected to dent its export sector significantly, which could weaken its overall Gross Domestic Product (GDP) growth and result in further depreciation in the Euro.
- Big banks, including JPMorgan and Deutsche Bank, reckon a drop to parity could happen, depending on the extent of tariffs. Tax cuts could also fuel US inflation and limit Federal Reserve interest rate cuts, making the Dollar potentially more attractive than the Euro, Reuters reported.
- Meanwhile, expectations for the European inflation remaining under control have prompted expectations of more interest rate cuts by the European Central Bank (ECB). ECB Governing Council Member and Bank of Finland Governor Olli Rehn commented on Tuesday that the Deposit Rate could decline the so-called neutral rate in the first half of 2025. According to the ECB staff, the neutral rate is around 2% or 2.25%.
Technical Analysis: EUR/USD sees support near 1.0500
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EUR/USD slides to its lowest since November 1, 2023, near 1.0530. The major currency pair weakened after breaking below the April 16 low of 1.0600. The outlook of the shared currency pair has become bearish as all short to long-term Exponential Moving Averages (EMAs) are declining.
The 14-day Relative Strength Index (RSI) drops to nearly 30.00, adding to evidence of more weakness in the near term.
Looking down, the pair is expected to find a cushion near the psychological support of 1.0500. On the flip side, the round-level resistance of 1.0700 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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