EUR/USD climbs to five-day highs as soft US data pressures the Dollar

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The Euro (EUR) strengthens against the US Dollar (USD) on Tuesday as the Greenback retreats after a batch of softer-than-expected US economic data weighed on sentiment, helping the Euro stage a sharp rebound to five-day highs.

EUR/USD advances as the US Dollar weakens following softer US data.
PPI and Retail Sales both softened below expectations, signalling easing inflation and cooling consumer demand in the US.
Fed expectations tilt dovish with markets heavily favouring a December rate cut.

At the time of writing, EUR/USD is trading around 1.1567, up nearly 0.40%. Meanwhile, the US Dollar Index (DXY), which measures the Greenback’s value against a basket of major currencies, is easing from near six-month highs and hovering around 99.84 as bearish pressure builds.

The delayed US data showed the headline Producer Price Index (PPI) for September rising 0.3% MoM, matching expectations after a 0.1% decline in August, while the annual rate held steady at 2.7%. However, the underlying components were softer, with core PPI increasing only 0.2% on the month, undershooting forecasts of 0.3%, and easing to 2.6% YoY from 2.9%.

According to the Bureau of Labor Statistics release, the monthly increase was driven largely by higher goods prices and a sharp rise in gasoline costs, while services remained unchanged.

At the same time, US Retail Sales data pointed to weakening consumer demand. Headline Retail Sales rose 0.2% MoM, missing the 0.4% forecast and slowing from 0.6% in August. On an annual basis, Retail Sales rose 4.3% YoY in September, easing from around 5.0% in August.

The more meaningful Retail Sales Control Group, which feeds directly into GDP calculations, contracted 0.1% in September, missing expectations for a 0.3% increase and easing from 0.6% in August. Retail Sales ex-Autos came in at 0.3% MoM, undershooting the 0.4% forecast and slowing from 0.6% in August.

Labour market indicators added to the softer outlook, with the ADP Employment Change 4-week average dropping to -13.5K from -2.5K in the previous four-week period, reinforcing evidence that the labour market is losing steam.

The data strengthened the case that the Federal Reserve (Fed) could deliver another interest rate cut in December, supporting the view of several policymakers who have signalled openness to easing. According to the CME FedWatch Tool, markets are now pricing in around an 84% probability of a rate cut at the December 9-10 meeting.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.