Euro Benefits From Speculation
The Euro benefits from speculation that the ECB will not further lower interest rates, supported by comments from ECB officials. Upcoming Eurozone HICP data is expected, showing a 2.1% increase annually in November with a core rise to 2.5%.
The Euro is the currency of 20 EU nations, being the world’s second-most-traded currency. It accounted for 31% of foreign exchange transactions in 2022 with an average turnover over $2.2 trillion daily, particularly in EUR/USD trading.
The ECB, located in Frankfurt, manages the Eurozone’s monetary policy, with inflation data like the HICP being critical for decisions on interest rates. Economic indicators and trade balances also influence the Euro’s value, with strong data typically resulting in a stronger currency.
With the EUR/USD cross pushing above 1.1600, the immediate trend appears to be driven by a weakening US dollar. The recent US Manufacturing PMI figure of 48.2 marks the ninth consecutive month of contraction, increasing the pressure on the Federal Reserve. This has cemented expectations for a rate cut at the upcoming December 9-10 meeting, with market probability now sitting near 87%.
Fed Rate Expectations
This view of a softening US economy is further supported by other recent data points we’ve seen. November’s Non-Farm Payrolls report showed job creation slowing to 145,000, below forecasts, and the latest Core PCE inflation reading has cooled to 2.9% year-over-year. These statistics give the Fed ample reason to begin easing its monetary policy to support the economy.
On the other side of the pair, the Euro is finding support as we believe the European Central Bank is finished with its own rate adjustments for now. Recent comments from ECB officials suggest they are comfortable with current borrowing costs, especially as German business sentiment has shown signs of stabilizing. This creates a clear policy divergence that favors Euro strength against the dollar, a stark contrast to the synchronized rate hikes we saw back in 2023.
