Can the Euro withstand pressure from Friday's US NFP release after retreating from a one-month high?

EUR/USD trades marginally above 1.1200, having touched its strongest level since early October.
A rate hike hinges on data released between now and December, says ECB President Lagarde.
Friday brings US payrolls, followed by eurozone third-quarter GDP on 13 November.

The Euro has weakened as the Dollar recoups some of Wednesday's losses, despite eurozone producer prices rising 11.1% year-on-year in September. European Central Bank (ECB) President Lagarde said incoming data between now and December will determine a rate hike. After climbing to just below 1.1300 on Wednesday, its strongest level since early October, EUR/USD now trades marginally above 1.1200.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Speaking in Milan, ECB President Lagarde attributed most of October's eurozone inflation to energy, after the rate hit a three-year high of 4%. While cautioning against wielding the interest-rate tool like a hammer, she said the ECB must still use it to prevent expectations from spiralling. A December hike 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%.

Following the Democrats' capture of the House and the Senate, the Dollar fell to a one-month low on Wednesday as the Euro touched a high. Thursday's jobless claims reading of 189K was 7K below forecasts. Unit labour costs, however, declined 0.7% in the third quarter, compared with expectations of a 0.6% increase. Markets priced the probability of a December Fed hike at close to 70% after Thursday's releases, down from above 80% on Wednesday. The deposit rate remains a point and a quarter below the Fed's range.

Which upcoming releases could shape rate expectations?

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

On the US side of the rate gap, October Nonfarm Payrolls (NFP) are scheduled for Friday at 13:30 GMT, with 65K forecast against the previous 29K. The October Consumer Price Index (CPI) follows on Tuesday, 10 November; expectations stand at 0.3%, compared with 0.6% previously. Both releases will inform the Fed's 8-9 December meeting.

What do the EUR/USD charts indicate?

About a third of the advance from the 29 October low, which was just above 1.1100, has been erased by the pullback. EUR/USD continues to trade beneath its 50-day Exponential Moving Average (EMA), located just above 1.1300. It has also remained below the 200-day EMA, just above 1.1450, since mid-September. On the daily chart, momentum has rolled over from overbought levels.

Daily chart for EUR/USD

Euro: frequently asked questions

Which countries use the Euro, and how widely is it traded?

Only the US Dollar is traded more actively worldwide than the Euro, the currency used by the 20 European Union countries that make up the Eurozone. The Euro represented 31% of all foreign exchange transactions in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most actively traded currency pair. Next come EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 2%.

How does the ECB influence the Euro, and what is its role?

Interest-rate decisions and monetary policy for the Eurozone are managed by the European Central Bank (ECB), its reserve bank, based in Frankfurt, Germany. Maintaining price stability is the ECB's principal mandate, whether through curbing inflation or supporting growth. Raising or cutting interest rates is its main policy instrument. The Euro generally benefits when rates are relatively high or are expected to rise; the reverse also holds. Monetary policy is decided by the ECB Governing Council at eight meetings each year. Those decisions are taken by the heads of the Eurozone's national banks together with six permanent members, among them ECB President Christine Lagarde.

Why do inflation readings matter for the Euro?

For the Euro, an important economic measure is Eurozone inflation, tracked through the Harmonised Index of Consumer Prices (HICP). Inflation that exceeds expectations, particularly when it is above the ECB's 2% target, requires the central bank to increase interest rates to bring price pressures under control. When interest rates are relatively high compared with those elsewhere, the Euro usually benefits. Higher rates make the region a more attractive destination for global investors' funds.

Which economic indicators can move the Euro?

The Euro can react to data releases that reveal the economy's condition. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators capable of steering the single currency. Economic strength supports the Euro by drawing in additional foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular weight is attached to data from Germany, France, Italy and Spain. As the euro area's four largest economies, they together represent 75% of the Eurozone's economy.

Why does the Trade Balance matter for the Euro?

The gap between a country's export earnings and its import spending over a specified period is captured by the Trade Balance, another important release for the Euro. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods, lifting the currency's value. A positive net Trade Balance therefore strengthens a currency, while a negative balance has the opposite effect.