Euro faces pressure from Friday’s US NFP release after retreating from a one-month high

• EUR/USD trades slightly above 1.1200, having touched its strongest level since early October.
• Data released before December will determine a rate increase, according to ECB President Lagarde.
• Friday brings US payrolls, with eurozone third-quarter GDP to follow on 13 November.

September producer prices in the eurozone were 11.1% higher than a year earlier. European Central Bank (ECB) President Lagarde said incoming data between now and December would determine whether rates rise. Despite this, the euro has weakened as the dollar recoups some of Wednesday's losses. Having climbed to just below 1.1300 on Wednesday, its highest level since early October, EUR/USD now trades a little above 1.1200.

At 4% in October, eurozone inflation stood at a three-year high. Speaking in Milan, ECB President Lagarde attributed most of it to energy. While cautioning against wielding interest rates like a hammer, she said the ECB must still use them to prevent expectations from running out of control. A December increase may be necessary, according to both Bundesbank President Nagel and Bank of Italy Governor Panetta. Such a move would raise the deposit rate from 2.5%.

After Democrats took the House and the Senate, the dollar slipped to a one-month low on Wednesday as the euro reached a high. Thursday's jobless claims subsequently registered 189K, undershooting forecasts by 7K. Unit labour costs, however, declined 0.7% in the third quarter rather than rising by the expected 0.6%. Following those releases, markets put the likelihood of a December Fed rate increase at close to 70%, down from more than 80% on Wednesday. The deposit rate remains a point and a quarter below the Fed's range.

Upcoming releases shape the policy outlook

Friday's schedule begins with a speech by ECB Chief Economist Lane at 09:30 GMT. September retail sales are then due at 10:00 GMT, with a monthly decline of 0.1% expected following growth of 0.1%. Monday brings the Sentix survey at 09:30 GMT, following a reading of 2.7. The second estimate of third-quarter Gross Domestic Product (GDP) is scheduled for 10:00 GMT on Friday, 13 November, after growth of 0.4%. These three releases will inform the ECB's December meeting.

A rise to 65K from 29K is forecast for October Nonfarm Payrolls (NFP), due on Friday at 13:30 GMT. The October Consumer Price Index (CPI) follows on Tuesday, 10 November, with a reading of 0.3% expected after 0.6%. Both releases will inform the Fed's 8–9 December meeting, on the other side of the rate gap.

EUR/USD gives back part of its advance

About a third of the advance from the 29 October low, just above 1.1100, has been erased by the pullback. EUR/USD continues to trade beneath its 50-day Exponential Moving Average (EMA), which sits just above 1.1300. Since mid-September, it has also remained below the 200-day EMA, just above 1.1450. On the daily chart, momentum has reversed lower from overbought territory.

Daily EUR/USD price chart