Euro loses momentum as US Dollar regains footing after election-led volatility

• EUR/USD turns lower as the US Dollar recovers from post-election sell-off.
• Low US Jobless Claims and hawkish Fed remarks reinforce December rate hike expectations.
• Eurozone producer inflation accelerates as traders also price in further ECB tightening.

EUR/USD slips into negative territory on Thursday as the US Dollar (USD) rebounds from its post-election sell-off. Lower-than-expected US Initial Jobless Claims and hawkish remarks from Federal Reserve (Fed) officials help the Greenback regain ground. At the time of writing, the pair trades around 1.1220, easing from an intraday high of 1.1268.

The Greenback fell to five-week lows on Wednesday as the Democratic sweep of Congress fuelled expectations of less fiscal expansion under a divided government, pushing Treasury yields lower. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.60, recovering from an intraday low of 101.20.

Traders also bet that Congress could restrict funding for President Donald Trump’s military campaign against Iran and increase pressure to end the war. This sent Oil prices sharply lower, though they remain well above pre-war levels, keeping inflation risks alive.

Cleveland Fed President Beth Hammack said on Thursday that “monetary policy needs to move to a restrictive stance” as inflation has been “too high, moving in the wrong direction.” Richmond Fed President Thomas Barkin said, “I do not anticipate inflation will accelerate, but also don’t see it falling at this point.” He described inflation as the Fed’s most important risk and said gradual tightening “makes sense.”

On the data front, US Initial Jobless Claims fell to 189K from 194K, below expectations of 196K, while the four-week moving average declined to 194.75K from 196.75K. Together, the data and remarks reinforce expectations of another Fed rate hike in December. Attention now turns to Friday’s Nonfarm Payrolls (NFP) report for fresh clues on the Fed’s policy path.

On the Euro side, traders also anticipate another European Central Bank (ECB) rate hike in December as inflation risks remain tilted to the upside. Eurozone Producer Price Index (PPI) inflation accelerated to 2.5% MoM in September from 2.0%, while the annual rate rose to 11.1% from 8.3%.

ECB Governing Council member Ante Zigman said inflation continued to rise in October, but added that it was “too early to say how much more tightening is needed.”