Forex Market: Euro rebounds from two-week lows, approaches parity with US Dollar

The Euro extends a rebound from a two-week low against the US Dollar on Monday, while moving closer to parity, as investors expect the European Central Bank will continue its policy tightening cycle to curb persistently high inflation.

ECB President Lagarde said last week interest rates should keep rising, despite the higher probability of the Eurozone entering a recession.

The most recent macro data showed headline inflation in the Eurozone had risen to a new record high of 10.7% in October, driven by a surge in food and energy prices, while economic growth had decelerated sharply to 0.2% in the third quarter – the weakest growth rate in 6 quarters.

Meanwhile, market players were still assessing last Friday’s US employment data, which revealed 261,000 jobs added in October, more than anticipated, and a continuing increase in hourly wages, suggesting labor market tightness.

But, there were indications of some easing of market conditions, as the unemployment rate rose to 3.7%. This seemed to have reinforced hopes that the much anticipated Fed pivot could be drawing near.

“It was, overall, a pretty mixed report,” Carol Kong, a currency strategist at Commonwealth Bank of Australia, was quoted as saying by Reuters.

“Judging by market reaction, investors really focused on the lift in unemployment rate, and that might have led to market participants scaling back their expectations on the Fed funds rate.”

Last week, several Federal Reserve officials indicated they would still consider a smaller rate hike at the bank’s upcoming policy meeting.

Markets are now pricing in a 69% chance of a 50 basis point hike by the Fed in December.

The US Dollar Index was last down 0.28% on the day to 110.479.

As of 9:44 GMT on Monday EUR/USD was edging up 0.30% to trade at 0.9988. Last week, the major Forex pair went down as low as 0.9730, which has been its weakest level since October 21st (0.9705).