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Euro-Dollar Retreats, Where Next? December EUR/USD Outlook

December 1, 2023 - Written by Ben Hughes


The Euro to Dollar (EUR/USD) exchange rate came under significant pressure after Thursday’s European open as further evidence of a sharp decline in Euro-Zone inflation reinforced expectations of an early cut in ECB interest rates.

EUR/USD retreated to lows just below 1.0910 ahead of the New York open before stabilising.

Month-end position adjustment will trigger near-term volatility with markets then focussing on comments from Fed Chair Powell on Friday.

The headline Euro-Zone inflation rate declined sharply to 2.4% from 3.2% previously. This was below consensus forecasts of 2.7% and the lowest reading for over two years.

The core rate also declined to 3.6% from 4.2% which was below expectations of 3.9% and the lowest reading since May 2022.

According to ING the process of disinflation is happening even more quickly than it expected, particularly for core inflation, where expectations were for price pressures to remain more stubborn.

It added; “This shows that signs of an imminent victory on inflation are mounting for the European Central Bank. When will they dare to admit so themselves? We expect a first rate cut before the summer.”

ING considers that the Euro will be vulnerable; “Lower inflation is hardly ever good for a currency and may keep the euro's upside room capped today, even though data from the US could cause large swings in EUR/USD regardless. We still favour a return to sub-1.0900 as opposed to a sustainable rally beyond 1.1000.”

The latest Federal Reserve report on economic activity, known as the Beige Book, reported that US economic activity slowed from early October through the middle of November, while businesses reported inflation largely moderated and it was easier to hire workers.

Four districts reporting modest growth, two indicating conditions were flat to slightly down, and six noting slight declines in activity.

The survey reinforced expectations of weakening inflation pressure and maintained expectations of a more dovish Fed stance.

Cleveland Fed President Mester toned down previous hawkish rhetoric and noted; "Monetary policy is in a good place for policymakers to assess incoming information on the economy and financial conditions."

Atlanta Fed President Bostic has maintained that rates at 5.50% is high enough.

According to Bostic; "There’s no question the rate of inflation has slowed materially over the past year-plus, and thus far we have avoided a disruptive surge in unemployment that often accompanies a steep slowdown in price increases. At the same time, I don’t think we’ve seen the full effects of restrictive policy, another reason I think we’ll see further cooling of economic activity and inflation."

ING still warned over complacency; “We are still doubtful the Fed will want to sit and watch as rates fall, given the lingering interest to keep financial conditions tight at the current juncture, so a more decisive pushback against rate cut bets remains a tangible risk for the FX market.”

US initial jobless claims increased to 218,000 in the latest week from a revised 211,000 previously and close to consensus forecasts of 220,000.

There was, however, a jump in continuing claims to 1.93mn from a revised 1.84mn previously and the highest reading for close to two years.

As far as inflation is concerned, the PCE prices index increased 3.0% in the year to October from 3.4% previously.

The core index increased 0.2% on the month with the year-on-year increase declining to 3.5% from 3.7%.

This was in line with market expectations and the lowest reading since June 2021.

According to Scotiabank; “The EUR/USD pair is trading nearly a cent off of Wednesday’s high but losses have not extended far enough at this point to put the short-term uptrend at risk.”

It added; “Additional losses through the 1.09 level would imply a little more downside risk for the EUR in the short run, however, towards stronger support in the 1.0825/1.0850 range.”

The bank still has a medium-term target of 1.11.
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