Euro momentum fades as US Dollar steadies following election-driven volatility

• EUR/USD slips as the US Dollar rebounds after its post-election sell-off.
• Expectations of a December rate hike strengthen on low US Jobless Claims and hawkish Fed commentary.
• Further ECB tightening remains priced in as Eurozone producer inflation gathers pace.

EUR/USD moves into the red on Thursday, with the US Dollar (USD) recouping losses from its post-election sell-off. The Greenback draws support from hawkish comments by Federal Reserve (Fed) officials and US Initial Jobless Claims that came in below expectations. Trading near 1.1220 at the time of writing, the pair has retreated from its intraday peak of 1.1268.

Treasury yields declined on Wednesday as the Democratic sweep of Congress raised expectations of reduced fiscal expansion under a divided government, sending the Greenback to five-week lows. Having rebounded from an intraday trough of 101.20, the US Dollar Index (DXY) stands near 101.60. The index measures the Greenback against a basket of six major currencies.

Oil prices dropped sharply as traders bet that Congress could curb funding for President Donald Trump’s military campaign against Iran and step up pressure to bring the war to an end. Prices nevertheless remain substantially above pre-war levels, leaving inflation risks in place.

With inflation “too high, moving in the wrong direction.” Cleveland Fed President Beth Hammack said on Thursday that “monetary policy needs to move to a restrictive stance”. For Richmond Fed President Thomas Barkin, inflation remains the Fed’s foremost risk, with gradual tightening an approach that “makes sense.” Barkin said, “I do not anticipate inflation will accelerate, but also don’t see it falling at this point.”

A decline in US Initial Jobless Claims to 189K from 194K undershot the forecast of 196K. The four-week moving average also eased, reaching 194.75K from 196.75K. Alongside officials’ comments, these figures bolster expectations of another Fed rate hike in December. Friday’s Nonfarm Payrolls (NFP) report is now in focus for further indications of the Fed’s policy direction.

Upside inflation risks are also sustaining traders’ expectations of another European Central Bank (ECB) rate hike in December. In the Eurozone, September Producer Price Index (PPI) inflation quickened from 2.0% to 2.5% MoM, with the annual rate climbing from 8.3% to 11.1%.

Although ECB Governing Council member Ante Zigman noted that inflation had risen further in October, he cautioned that it was “too early to say how much more tightening is needed.”