Euro edges lower as traders look ahead to Fed and ECB monetary policy decisions

• France’s fiscal concerns and a stronger US Dollar put pressure on the Euro, nudging EUR/USD lower.
• With interest rates expected to remain unchanged at both central banks, traders turn to this week’s Fed and ECB policy announcements.
• Forthcoming US inflation data and Eurozone growth readings may shape expectations for policy changes in December.

With monetary policy decisions from the Federal Reserve (Fed) and European Central Bank (ECB) due this week, EUR/USD slips on Monday as the recovering US Dollar (USD) puts pressure on the Euro (EUR). Further weighing on the single currency are France’s deteriorating fiscal outlook and strains in the bond market.

Trading at around 1.1183 at the time of writing, the pair is 0.17% lower on the day. Meanwhile, the US Dollar Index (DXY) stands near 101.99, having touched 101.45 last week, its weakest reading since October 1. The index measures the Greenback against a basket of six major currencies.

Interest rates are widely expected to remain on hold when the Fed delivers its decision on Wednesday and the ECB follows on Thursday. Both face inflation above their respective 2% targets, with rising energy costs associated with Middle East tensions adding to upside risks. As traders expect both central banks to raise rates in December, their guidance on the policy path may prompt a greater market response than the decisions themselves.

Euro comes under pressure as oil and inflation expectations rise faster than the ECB response

Commerzbank considers the latest increase in oil prices particularly challenging for the Euro, arguing that “higher oil prices in particular should put greater pressure on the euro, as their impact on both inflation and economic activity in the euro area is more pronounced and, on balance, negative for the currency.” In the bank’s assessment, “short-term inflation expectations have risen more strongly in the euro area than in the US,” while “higher inflation expectations are currently not being offset by a corresponding shift in relative interest-rate expectations.” Commerzbank’s overall conclusion is that “this is, in principle, a negative signal for the euro.”

Despite the recent widening of French spreads, Commerzbank notes that broader Eurozone strains have yet to emerge: “this suggests that the market currently views the fiscal concerns largely as a French problem.” The bank identifies “one possible explanation” as “the expectation that the ECB would intervene if contagion became more pronounced, thereby limiting the risk of broader fragmentation in the euro-area bond market.”

Alongside the central bank announcements, a full schedule of economic releases may shape EUR/USD trading this week. In the US, Tuesday brings the ADP employment update, Durable Goods Orders for September, Consumer Confidence for October and New Home Sales for September. Due on Thursday are September’s Personal Consumption Expenditures (PCE) inflation figures, the advance third-quarter Gross Domestic Product (GDP) estimate and weekly Initial Jobless Claims.

Thursday’s Eurozone calendar features October readings for the business climate, consumer confidence and economic sentiment. The bloc’s preliminary third-quarter GDP figures and unemployment rate follow on Friday, together with Germany’s preliminary October Consumer Price Index (CPI).