ECB rate hike expectations and softer US Dollar lift Euro

4% Eurozone inflation supports EUR/USD gains. Firm ECB policymaker remarks also strengthen expectations of a December rate increase.
Despite strong expectations of a 25-basis-point US Federal Reserve rate rise, the US Dollar weakens.
Further EUR/USD advances may be capped by robust US jobs figures and forthcoming inflation releases.

EUR/USD trades near 1.1150 in Monday’s Asian session. The pair is recovering after two consecutive days of declines. Support for the Euro (EUR) follows comments from several European Central Bank (ECB) policymakers, including the German and Italian central bank heads, indicating that a December rate rise may be likely.

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

Higher energy costs pushed Eurozone inflation to 4% in October, its highest level in three years, reinforcing the argument for additional monetary tightening. Speaking on Thursday, ECB President Christine Lagarde said the central bank was closely assessing incoming data to judge whether an interest rate increase was justified next month.

A weaker US Dollar (USD) is also supporting EUR/USD. This comes despite the CME FedWatch tool putting the probability of another 25-basis-point rate increase at the December 8-9 Federal Open Market Committee (FOMC) meeting at near 80%, up from earlier levels.

However, stronger US employment figures could support the Greenback and restrain the pair. October Nonfarm Payrolls (NFP) increased by 165,000, exceeding the 65,000 market consensus and September’s 60,000 reading. The Unemployment Rate edged lower to 4.1%, compared with a 4.2% forecast. Investors now await Tuesday’s US Consumer Price Index (CPI) report and Friday’s Producer Price Index (PPI) release for further clues on the Federal Reserve’s forthcoming policy decisions.

Dollar misses safe-haven support as yields and Fed hike expectations ease

The latest wave of risk aversion has failed to support the Dollar, according to strategists at ABN Amro, who note that "the USD struggled to benefit as US Treasury yields and Fed hike expectations fell." Their assessment is consistent with wider market commentary: reduced rate expectations are constraining Dollar gains even when investors are avoiding risk.

Euro: key questions answered

The Euro’s role in global currency trading

Used by the 20 European Union countries within the Eurozone, the Euro ranks second only to the US Dollar in global currency trading. Its share of all foreign exchange transactions reached 31% in 2022, with daily turnover averaging more than $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most actively traded currency pair. Next are EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The ECB’s role in setting policy and influencing the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and overseeing monetary policy. Maintaining price stability is its main mandate, whether through inflation control or support for growth. Interest rate increases and cuts are its principal policy tools. Higher relative interest rates, or expectations of increases, generally support the Euro; lower rates have the opposite effect. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national central banks and six permanent members, among them ECB President Christine Lagarde.

2% inflation target: why price data matters for the Euro

Measured through the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic gauge for the Euro. An above-forecast rise, particularly beyond the ECB’s 2% target, requires the central bank to increase interest rates to regain control of inflation. When interest rates exceed those of its counterparts, the Euro usually benefits. Higher returns make the region a more attractive destination for global investors’ funds.

75% of the Eurozone economy: key data and the Euro

The Euro can respond to economic releases because they indicate the economy’s health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can each shape the single currency’s direction. Economic strength supports the Euro by attracting additional overseas investment. It may also prompt the ECB to increase interest rates, directly strengthening the currency. Conversely, weak economic readings are likely to weigh on the Euro. Particular attention goes to Germany, France, Italy and Spain, the euro area’s four largest economies. Together, they represent 75% of the Eurozone economy.

Trade Balance: how export demand affects the Euro

The Trade Balance is another important release for the Euro. It captures the gap between a country’s export earnings and its import expenditure over a specified period. Strong demand for a country’s exports creates additional demand for its currency as foreign buyers seek to purchase those goods, lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the reverse effect.