One-Month High Reversal: Euro Under Pressure Ahead of Friday's US NFP

1.1200 remains just below EUR/USD after the pair touched its highest level since early October.
Incoming data ahead of December will determine a rate rise, says ECB President Lagarde.
Friday brings US payrolls, with eurozone third-quarter GDP following on 13 November.

11.1% was the annual rise in eurozone producer prices in September. European Central Bank (ECB) President Lagarde said incoming data between now and December will determine a rate rise. Nevertheless, the Euro has weakened as the Dollar recoups some of Wednesday's losses. After approaching 1.1300 on Wednesday, its highest level since early October, EUR/USD now trades just above 1.1200.

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

At 4% in October, eurozone inflation stood at a three-year high. Speaking in Milan, ECB President Lagarde attributed most of it to energy. She cautioned against wielding interest rates like a hammer, while maintaining that the ECB must still use them to prevent expectations from becoming unanchored. A December rate rise 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 touched a one-month low on Wednesday as the Euro reached a high. Thursday's jobless claims totalled 189K, undershooting forecasts by 7K. Third-quarter unit labour costs, however, declined 0.7%, versus an expected increase of 0.6%. Markets put the probability of a December Fed rate rise at nearly 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.

Economic Releases Ahead

At 09:30 GMT on Friday, ECB Chief Economist Lane is scheduled to speak. September retail sales are due at 10:00 GMT, with a monthly decline of 0.1% forecast 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, following growth of 0.4%. These three releases will inform the ECB's December meeting.

Forecasts put October Nonfarm Payrolls (NFP) at 65K, up from 29K, ahead of Friday's release at 13:30 GMT. The October Consumer Price Index (CPI), due on Tuesday, 10 November, is expected at 0.3%, following 0.6%. Both reports will inform the Fed's 8-9 December meeting, shaping the other side of the rate gap.

Technical Position

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

Daily EUR/USD Price Chart

Euro: Key Questions Answered

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

Across the European Union, 20 countries use the Euro and form the Eurozone. Only the US Dollar is traded more extensively worldwide. The Euro represented 31% of foreign exchange transactions in 2022, generating average daily turnover of more than $2.2 trillion. With an estimated 30% share of all transactions, EUR/USD ranks as the world's most traded currency pair. Next come EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 2%.

The ECB's Role in the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting interest rates and directing monetary policy. Price stability is its core mandate, requiring it either to contain inflation or support growth. Adjustments to interest rates are its main policy instrument. Higher rates relative to other economies, or expectations of an increase, generally support the Euro; the reverse also applies. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The heads of Eurozone national banks take these decisions alongside six permanent members, among them ECB President Christine Lagarde.

Inflation's Effect on the Euro

Measured through the Harmonised Index of Consumer Prices (HICP), eurozone inflation is a key economic metric for the Euro. An above-forecast increase, particularly beyond the ECB's 2% target, obliges the central bank to raise interest rates to restore control over inflation. When rates exceed those in other economies, the Euro generally benefits. The higher returns make the region a more attractive destination for global investors' funds.

Economic Indicators and the Euro

By revealing the economy's condition, data releases can move the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys all help shape the single currency's direction. Economic strength supports the Euro by attracting foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak figures, by contrast, are likely to weigh on the Euro. Particular attention goes to Germany, France, Italy and Spain. Together, these four largest euro-area economies represent 75% of the Eurozone's economy.

The Trade Balance and the Euro

The Trade Balance is another important release for the Euro. Over a specified period, it records the difference between a country's export earnings and its spending on imports. Strong demand for a country's exports creates additional demand for its currency as overseas buyers purchase those goods, lifting the currency's value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.