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Euro-Dollar Slides to Near 1.08 on ECB Rate-Cut Speculation and Gold Reversal

December 5, 2023 - Written by Ben Hughes


Markets remain convinced that US and ECB interest rates will not be increased further, especially with evidence of weakening inflation pressures.

Markets are also confident that both central banks will cut interest rates next year.

After jumping in Asia, gold posted sharp losses during the day which underpinned the dollar and the Euro also lost ground with the Euro to Dollar (EUR/USD) exchange rate sliding to 20-day lows just above 1.0800.

There are key US data releases this week, especially for the jobs market.

According to MUFG; “It will now be important that the incoming US economic data flow continues to show evidence of slowing inflation and weakening demand to back up more aggressive Fed rate cut expectations. If there is any disappointment it will trigger a relief rally for US yields and the US dollar.”

It added; “The main test of the recent dovish repricing in the week ahead will be the release of the latest non-farm payrolls report on Friday that is expected to reveal further evidence that demand and supply in the labour market are becoming better aligned.”

ING expects a blowout report will be needed to boost the dollar; “Given a propensity for investors to put money to work outside of the dollar, we think a consensus outcome would be a mild dollar negative. We think it would really have to be a strong number to put the idea of another Fed rate hike back on the table.”

Scotiabank noted that December’s seasonal trends tend to be broadly USD negative and added; “This week’s data—and Friday’s NFP in particular—will likely determine the broader pattern of trade for the USD into the holiday period at least. Very firm data will be needed to lift US yields and the USD.”

Consensus forecasts are for an increase in non-farm payrolls of around 185,000 for November after an increase of 150,000 the previous month.

There is the potential for distortion from returning strike workers and inflate the headline number.

The unemployment rate is forecast to remain at 3.9% while average hourly earnings are forecast to increase 0.3% after a 0.2% increase for October.

Euro-Zone developments will also be a key element.

According to MUFG; “With inflation likely to fall back to target next year and growth set to remain weak, it will become harder for the ECB to maintain their current restrictive policy stance.”

MUFG added; “The developments support our view that the ECB will begin to cut rates from Q2 of next year, and is one of the reasons why we remain cautious over further upside for EUR/USD beyond the 1.1000-level even as the US dollar as weakened.”

Commerzbank notes there are still important barriers for the German economy; “Electricity prices are likely to fall again, but remain a competitive disadvantage for the German economy.”

As far as the data is concerned, the Euro-Zone Sentix investor confidence index improved to a 6-month high of -16.8 for December from -18.6 previously, but this was weaker than expectations of -15.0.

Sentix discussed whether the Euro area was poised for recovery.

It adds; “The still weak overall momentum and the lack of a certain amount of international support speak against this.”

HSBC considers whether the ECB will be happy with the loosening of financial conditions and added; “Our economists suspect not, and forecast a forceful pushback at next week’s ECB meeting.”

It did, however, add; “the market may simply stick to its view that inflation will allow a succession of 2024 rate cuts, irrespective of current central bank guidance.”

According to UoB; “The bias is still for EUR to dip further to 1.0810. The chance of it breaking clearly below this level is still not high.”

Scotiabank added; “EUR needs to regain 1.0920 to strengthen further intraday.”
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