Euro Gains as ECB Rate Rise Expectations Build and US Dollar Weakens

• Eurozone inflation of 4% and firm comments from ECB policymakers strengthen expectations of a December rate rise, lifting EUR/USD.
• Despite strong market expectations of a 25-basis-point rate rise by the US Federal Reserve, the US Dollar weakens.
• Further EUR/USD advances may be constrained by robust US employment figures and forthcoming inflation releases.

At around 1.1150 in Monday’s Asian trading, EUR/USD is recovering from two consecutive days of declines. Support for the Euro (EUR) comes from comments by several European Central Bank (ECB) policymakers, among them the German and Italian central bank heads, indicating that an interest rate rise in December may be likely.

At 4% in October, Eurozone inflation reached its highest level in three years as energy costs increased, strengthening the argument for additional monetary tightening. Speaking on Thursday, ECB President Christine Lagarde said the central bank was closely assessing incoming data to judge whether an interest rate rise would be justified next month.

A weaker US Dollar (USD) is also helping EUR/USD advance. This comes despite the CME FedWatch tool showing that the probability of a further 25-basis-point rate rise at the December 8-9 Federal Open Market Committee (FOMC) meeting has climbed to nearly 80%.

Stronger US employment figures could, however, support the Greenback and weigh on the pair. October’s Nonfarm Payrolls (NFP) increased by 165,000, exceeding the consensus forecast of 65,000 and September’s reading of 60,000. The Unemployment Rate edged lower to 4.1%, compared with expectations of 4.2%. Investors now await Tuesday’s US Consumer Price Index (CPI) release and Friday’s Producer Price Index (PPI), seeking further indications of the Federal Reserve’s forthcoming policy decisions.

Dollar gains remain elusive as yields and Fed rate expectations fall

The latest wave of risk aversion has failed to support the Dollar, according to strategists at ABN Amro, who note that "the USD struggled to benefit as US Treasury yields and Fed hike expectations fell." Their assessment echoes wider market commentary that reduced interest rate expectations are restraining the Dollar’s upside, even amid a risk-off mood.