US Dollar stabilises after election-driven volatility as Euro momentum fades

• A US Dollar rebound following the post-election sell-off pushes EUR/USD lower.
• December rate hike expectations strengthen on low US Jobless Claims and hawkish Fed commentary.
• Faster Eurozone producer inflation accompanies market pricing for additional ECB tightening.

EUR/USD trades near 1.1220 at the time of writing. Down from an intraday peak of 1.1268, the pair moves into negative territory on Thursday as the US Dollar (USD) recovers from its post-election sell-off. Initial Jobless Claims below forecasts and hawkish comments from Federal Reserve (Fed) officials support the Greenback’s rebound.

A Democratic sweep of Congress drove the Greenback to five-week lows on Wednesday. Expectations of reduced fiscal expansion under a divided government weighed on Treasury yields. Now near 101.60, the US Dollar Index (DXY) has rebounded from an intraday trough of 101.20. The index measures the Greenback against a basket of six major currencies.

Oil prices dropped sharply as traders wagered that Congress could curb funding for President Donald Trump’s military campaign against Iran and intensify pressure to end the war. Even after the decline, prices remain well above pre-war levels, sustaining inflation risks.

On Thursday, Cleveland Fed President Beth Hammack argued that “monetary policy needs to move to a restrictive stance”, with inflation “too high, moving in the wrong direction.” Richmond Fed President Thomas Barkin offered a similar warning: “I do not anticipate inflation will accelerate, but also don’t see it falling at this point.” Identifying inflation as the Fed’s biggest risk, he said gradual tightening “makes sense.”

US Initial Jobless Claims dropped from 194K to 189K, undershooting the 196K forecast. The four-week moving average also eased, from 196.75K to 194.75K. Combined with officials’ comments, these figures bolster expectations for another Fed rate increase in December. Friday’s Nonfarm Payrolls (NFP) report is the next focus for signals on the Fed’s policy trajectory.

September’s Eurozone Producer Price Index (PPI) inflation reached 2.5% MoM, up from 2.0%, while annual inflation climbed from 8.3% to 11.1%. With inflation risks still skewed upwards, traders also expect another European Central Bank (ECB) rate increase in December.

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