Euro pares losses as improved risk sentiment offsets weak German data

• Following a recovery from Friday’s lows near 1.1130, EUR/USD edges towards 1.1200.
• Lower oil prices and continuing diplomatic efforts to end the US-Iran war have helped ease AI concerns as the week begins.
• Robust US economic figures and expectations of Fed tightening are likely to contain the Dollar’s decline.

Disappointing German Trade Balance data released earlier on Monday have failed to prevent the Euro (EUR) from gaining about 0.4% against the US Dollar (USD). A modest appetite for risk is supporting the single currency in a quiet start to the week. At the time of writing, EUR/USD is trading around 1.1190, above Friday’s high of 1.1130.

With AI concerns receding, at least for the time being, and diplomatic efforts to resolve the Middle East conflict continuing, the week has begun on a cautiously optimistic note. Major European equity indices are posting modest gains. Meanwhile, Brent oil prices are consolidating below the key $100 mark, offering significant relief to the Eurozone’s oil-importing economies.

Germany’s trade surplus fell to EUR 15.6 billion in September from EUR 17.8 billion in August, according to figures published by Destatis earlier on Monday. The result fell short of expectations for a EUR 19.2 billion surplus, with imports rising far more than exports. Nevertheless, the upbeat market mood has outweighed the disappointing German Trade Balance figures.

Safe-haven USD falls sharply despite strong NFP figures and expectations of Fed tightening

Friday’s US Nonfarm Payrolls release showed a net increase of 165K jobs, comfortably exceeding the market consensus for growth of 65K. The Unemployment Rate also fell to 4.1%.

Expectations of another interest rate rise at the Federal Reserve’s (Fed) December meeting have firmed following these figures. Later that day, New York Fed President John Williams, St. Louis Fed President Alberto Musalem and San Francisco Fed President Mary Daly lent support to that view.

In a note, analysts at Commerzbank Research point out that “of the 18 Fed officials who submitted projections for the appropriate path of interest rates in September, 16 anticipated at least one more rate hike this year (...)”. The bank adds that “the data released since then are unlikely to have changed that assessment materially,” in its assessment.

Resilient US labour market supports expectations of further Fed rate hikes

Recent data still give the Federal Reserve scope to tighten monetary policy further, according to analysts at Commerzbank Research, who note that “on balance, the U.S. labor market remains solid and poses no obstacle to further interest rate hikes.” In the bank’s view, “the data released since then are unlikely to have changed that assessment materially.” It highlights that “of the 18 Fed officials who submitted projections for the appropriate path of interest rates in September, 16 anticipated at least one more rate hike this year,” as the basis for that assessment.