Euro loses ground on prospect of Fed rate hike
The European currency ended Tuesday, November 10, with a notable decline against the US dollar. The main reason was the American inflation statistics, which turned out to be worse than expected from the point of view of fighting price growth and strengthened assumptions about further tightening of the Fed's monetary policy.
As a result, the EUR/USD pair dropped to around 1.1160. The dollar also strengthened against other major world currencies.
What influenced the euro on Tuesday
The main event of the day was the release of the US Consumer Price Index (CPI) for October. Overall inflation in the US rose by 0.4% for the month against a forecast of 0.3%. Core inflation (excluding food and energy) also came in at 0.3% versus the expected 0.2%.
Thus, price pressure in the American economy turned out to be stronger than forecasts. This significantly complicates the Fed's task and reduces the likelihood of an early easing of monetary policy.
Additional support for the dollar came from statements by Fed representative Christopher Waller. He allowed for the need to raise the interest rate in December by 0.25 percentage points, and if inflationary pressure remains high, he proposed considering an even larger step.
After the release of the statistics, the probability of a December Fed rate hike, according to CME FedWatch, was estimated by the market at about 91%.
The yield on two-year US government bonds rose to 4.73%, and the DXY dollar index grew by about 0.57% to 102.26 points.
Another event was data from China. The country's trade balance surplus in October came in below forecasts: $105.28 billion against the expected $125.8 billion. This increased investors' caution regarding the prospects of the global economy.
Meanwhile, ECB representatives, including Piero Cipollone, Joachim Nagel, Philip Lane, and Jose Luis Escriva, spoke on Tuesday. Their comments were also of interest to market participants, as investors continue to assess the prospects for European interest rates.
What is expected on Wednesday, November 11
On Wednesday, the economic calendar will be relatively quiet in terms of American statistics. However, several important benchmarks will appear for the euro.
1. Inflation in Germany. In the morning, the final data on consumer prices for October is expected to be released. Forecasts: monthly inflation: −0.2%; annual inflation: 2.8%; harmonized inflation: 2.8% year-on-year.
If the final figures turn out to be higher than preliminary estimates, this could somewhat support the euro, as it would strengthen arguments in favor of maintaining a relatively tight ECB policy.
2. Industrial production in Italy.
Data on industrial production for September will also be released. A monthly growth of 0.7% is expected after a previous decline of 1.3%. Strong statistics will be a positive signal for the European economy, although it is unlikely to be able to independently turn EUR/USD around against a strengthening dollar.
3. Speech by Christine Lagarde.
Particular attention will be paid by traders to the comments of the ECB head. Any hints of further interest rate hikes or concern about inflation may support the European currency.
4. Public holiday in the US.
On November 11, Veterans Day is celebrated in the United States. The US government bond market will be closed, which may lead to a decrease in liquidity and increased sensitivity of currency quotes to individual news. At the same time, the American stock market will continue to operate.
Forecast for EUR/USD
In the short term, the advantage remains on the side of the American dollar. Strong inflation in the US, tough statements by Fed representatives, and the high likelihood of a rate hike in December create an unfavorable backdrop for the euro.
On Wednesday, the main chance for the European currency to recover will be German inflation and Christine Lagarde's speech.
However, even positive European news may prove insufficient if the market continues to revise expectations regarding the Fed's interest rate policy towards tightening.
The main risk for the euro is further strengthening of the dollar and consolidation of EUR/USD below the 1.1150 mark. For buyers of the European currency to return, the market will need more convincing signals about a slowdown in American inflation and a change in the Fed's stance.
In the coming days, the difference in expectations regarding the actions of the two central banks will remain the main factor in determining the euro's exchange rate on FOREX.
