As traders weigh ECB's rate path, Euro edges higher near 1.1100

Modest buying lifts EUR/USD towards 1.1095 in early Asian trade on Thursday.
A December rate hike looks likely to Fed’s Waller, with a 50 bps increase also a possibility.
Signals of a potential ECB rate hike in December remain in focus for traders.

Modest gains take EUR/USD close to 1.1095 in Thursday’s early Asian session, although expectations of a larger interest rate increase by the US Federal Reserve (Fed) this year could constrain further upside in the pair.

Inflation exceeded market forecasts in October, with the Consumer Price Index (CPI) rising 0.4% MoM against expectations of 0.3%, according to Tuesday’s Bureau of Labor Statistics report. The previous increase was 0.6%. Excluding volatile food and energy prices, core CPI advanced 0.3%, above the projected 0.2% rise.

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

Fed Governor Christopher Waller indicated that a strong inflation reading could lead him to support a half-point rate increase in December.

For the Fed’s next meeting on December 8-9, traders now assign nearly 87.3% odds to a rate hike, according to the CME FedWatch tool. The probability of a half-point increase stands at 12.7%, up from around zero before the inflation release.

In Europe, European Central Bank (ECB) policymaker Philip Lane said that, although energy prices may be declining, interest rate decisions would hinge on the extent to which the recent jump in fuel costs feeds through to wages and other prices.

After the ECB left rates unchanged in October, President Christine Lagarde said last week that the central bank was assessing indicators to determine whether an interest rate increase would be justified next month.

Could ECB caution, Fed policy and French political risks weaken the Euro outlook?

Rabobank strategists highlight that “the Fed is not the only G10 central bank widely expected to hike rates in December,” describing the ECB as “among those banks also likely to tighten policy.” Their caveat is that “the ECB, however, could prove to be reluctant to hike rates beyond December,” citing indications from “the last ECB press conference” that “suggested that the GC were becoming increasingly concerns about the growth outlook.” Rabobank’s house view is that “market pricing for 2027 ECB rate rises remains too aggressive,” while the strategists also flag that “another factor that could weigh on the EUR in the coming months are uncertainties about what a far-right president in France could mean for EU cooperation going forward.” Reflecting these concerns, Rabobank “forecast a move to EUR/USD1.10 on a 3-month view.”

Can Lane’s emphasis on consensus and inflation lags offer modest support to the Euro?

With a score of 6.2/10 on FXS Speechtracker, ECB’s Lane matches his historical average exactly. The reading suggests a consistent, mildly hawkish bias rather than a significant change in tone. His emphasis on a “high premium on consensus” and a “high bar on directional forward guidance” points to an ECB unwilling to commit to aggressive easing, offering modest support to the Euro.

Concerns over persistent price pressures are reinforced by Lane’s use of underlying inflation to gauge inflation one year ahead, alongside expectations of second-round effects. Falling energy prices could pull headline inflation lower even as underlying inflation increases. Together with the need for an instrument to address multiple bond market equilibria, this suggests continued ECB caution towards policy easing, somewhat limiting the Euro’s downside.

Technical Analysis: Can EUR/USD shake off its bearish bias below the 100-day SMA?

A cluster of volatility and trend indicators above the spot price keeps the near-term outlook for EUR/USD bearish on the daily chart. All three 20-day Bollinger Bands are now above the price: the lower and middle bands provide immediate overhead supply, while the upper band and the 100-day simple moving average (SMA) underline the broader downside bias. At about 37, the Relative Strength Index (14) remains below the neutral 50 threshold. This suggests that, despite the recent easing in downward momentum, selling pressure continues to exceed buying interest on dips.

The lower Bollinger band near 1.1095 provides the first resistance on any advance, with the middle band around 1.1185 next in line. Further up, the upper band at roughly 1.1270 precedes the 100-day SMA near 1.1405. Together, these form a broader resistance zone that buyers would need to overcome to ease the prevailing bearish structure. As the tracked indicators show no clear nearby support below the current price, traders may continue to view rebounds towards this resistance cluster as opportunities to rejoin the established downtrend.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Euro: Frequently asked questions

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

Used by the 20 European Union countries in the Eurozone, the Euro ranks second only to the US Dollar among the world’s most traded currencies. Its share of all foreign exchange transactions stood at 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most actively traded currency pair. EUR/JPY follows with 4%, ahead of EUR/GBP at 3% and EUR/AUD at 2%.

What role does the ECB play in shaping the Euro’s value?

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 containing inflation or supporting growth. Changes in interest rates are its principal policy tool. Higher rates relative to other economies, or expectations of such rates, generally support the Euro; the reverse is also true. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of Eurozone national banks and six permanent members, among them ECB President Christine Lagarde.

Why do inflation figures matter for the Euro?

Measured through the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. An above-forecast rise in inflation, particularly beyond the ECB’s 2% target, obliges the central bank to increase interest rates to restore control over prices. When interest rates are relatively higher than those in other economies, the Euro usually benefits, as the region becomes a more attractive destination for global investors’ funds.

What can economic releases signal for the Euro?

By revealing the economy’s health, data releases can move the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators that can determine the single currency’s direction. Economic strength supports the Euro by drawing in more foreign investment and potentially prompting the ECB to raise interest rates, which would directly strengthen the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Figures from Germany, France, Italy and Spain carry particular importance. These are the euro area’s four largest economies and together represent 75% of the Eurozone economy.

Why is the Trade Balance important for the Euro?

The Trade Balance is another key release for the Euro, showing the gap between a country’s export earnings and its import spending over a specified period. Strong foreign 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 strengthens a currency, while a negative balance has the opposite effect.