Euro: Supported by ECB hike prospects – Commerzbank

Commerzbank’s Antje Praefcke notes that EUR/USD has been firm as the Dollar suffers from political fallout in the US and Euro area inflation hits 4%. With core inflation at 2.5% and the ECB deposit rate at 2.50%, markets now price in two further ECB hikes by mid‑2027, which currently underpin the Euro despite medium‑term growth concerns.

Euro benefits from ECB expectations

"EUR/USD steadily gained ground over the course of yesterday’s trading session. Initially, the dollar suffered from the after-effects of the Democrats’ landslide victory. The fact that Trump’s policies were punished so decisively came as something of a surprise."

"At the same time, euro area inflation rose to 4% year-on-year in October, while the core rate remained unchanged at 2.5%. Although these figures were in line with analysts’ expectations, with an inflation target of 2% and a deposit rate of 2.50%, they clearly make the case for further ECB rate hikes. After all, as a consequence of persistently high energy prices, an increasing number of companies is likely to pass on higher costs over time."

"As a result, core inflation is likely to rise in the coming months, even if headline inflation may already start to decline again due to base effects. The market therefore sees a good chance of two further ECB rate hikes by the middle of next year. For the time being at least, these expectations are providing support to the euro - although, of course, higher interest rates will weigh on the growth outlook over the medium term."

"The US labour market report is still due tomorrow. However, the Fed’s current focus is on inflation rather than employment. Moreover, the report is likely to be solid but unspectacular, meaning that it is unlikely to provide much tailwind for the dollar, especially since a Fed rate hike in December is already largely priced in. It is therefore possible that this week will ultimately belong to the euro, allowing it to head into the weekend somewhat stronger against the dollar."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)