Euro Nears 1.1250 on US Political Shift & Hot Inflation

Key Moments

Euro Firms as Dollar Softens on US Political Shift

EUR/USD is trading close to 1.1245 in early Asian dealings on Thursday, approaching its highest levels in nearly a month. The move reflects a weaker US Dollar against the Euro after Democrats won control of both chambers of the US Congress in the midterm elections. Market participants are also looking ahead to Germany’s Factory Orders report for September, scheduled for release later on Thursday.

Democrats secured majorities in both the US Senate and the House of Representatives on Tuesday, taking control from Republicans. Their gains included landmark victories in several long-held Republican constituencies, as tens of millions of voters delivered what was described as a sharp political setback to President Donald Trump.

“Given the Democrats are favoured right now, our expectation is that they will take control of both the House and the Senate,” said Carol Kong, currency strategist at Commonwealth Bank of Australia. If that pans out, the US dollar could sell off further from here, because a Democratic sweep would limit government spending over Trump’s term,” Carol added.

Eurozone Inflation at 4.0% Adds to ECB Policy Tension

The latest flash estimate for the Harmonized Index of Consumer Prices (HICP) in the Eurozone shows inflation at 4.0% in October, the highest reading in three years. The outcome is in line with market expectations and follows a 3.8% increase in September. It is the first time Eurozone inflation has reached or surpassed the 4% mark since a 4.3% reading in September 2023.

Last month, the European Central Bank (ECB) kept its main interest rate unchanged at 2.5%, after increasing it by 25 basis points in September. According to CNBC, markets are assigning approximately a 72.0% probability to another rate hike at the ECB’s final policy meeting of the year in December, slightly higher than the 71.8% probability before the latest inflation figures were released.

Mixed Eurozone Data but Growing Signals of December Tightening

Analysts at Scotiabank describe recent Eurozone data as mixed yet generally resilient. They observe that “Eurozone October CPI … confirmed at 4.0% Y/Y (2.5% for core)” while “final Eurozone Services and Composite PMIs were marked down slightly to 51.4 and 51.7 respectively on downward revisions to French data.”

On policy, Scotiabank highlights a clearly hawkish tone from ECB policymakers. The analysts note that “ECB Governor Nagel said Tuesday the inflation picture has worsened and that policy would probably have to be tightened in December.” They further point out that his colleague “Sleijpen said the Iran shock was more persistent than had been thought – although there were no second-round inflation effects visible at this point – while Governor Kocher said a December rate hike was likely unless circumstances change.”

Nagel Emphasizes High Likelihood of December Rate Hike

ECB Governor Nagel has recently adopted a more hawkish tone than usual, with an FXS Speechtracker score of 8.2 compared with a historical average of 7.0. A potential rate increase in December is described as “very likely” as inflation dynamics move closer to an adverse-scenario backdrop. His statement that the ECB “can and must” stop an energy shock from turning into broad-based inflation underscores a strong bias toward further tightening, which supports the Euro through rate expectations.

Nagel also expressed confidence that France will address its budget challenges, noting that this is “not a task for monetary policy.” This distinction between fiscal and monetary roles reinforces the ECB’s focus on price stability. For currency markets, the combination of firmer-than-expected inflation indicators and explicit readiness to tighten policy further tilts risks toward a stronger Euro, particularly if upcoming data validate the adverse-scenario narrative into December.

EUR/USD Technical Picture: Rebound Within a Still-Bearish Medium-Term Structure

On the daily chart, EUR/USD remains in a broader corrective mode as it continues to trade below the 100-day Simple Moving Average (SMA), maintaining a bearish medium-term bias despite the recent recovery. The pair is edging just under the upper Bollinger Band while holding above the 20-day Bollinger SMA, pointing to a short-term rebound inside a still-dominant downside configuration. The Relative Strength Index (RSI) stands at 50.9, having retreated from earlier oversold conditions, which indicates that selling pressure has eased but has yet to evolve into a robust bullish trend.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Euro Basics: Currency, Central Bank, and Key Drivers

What is the Euro?

The Euro is the common currency used by 20 European Union member states that form the Eurozone. It is the second most actively traded currency globally, behind the US Dollar. In 2022, it represented 31% of all foreign exchange transactions, with average daily turnover of more than $2.2 trillion.

The EUR/USD pair is the most heavily traded cross worldwide, accounting for an estimated 30% of all FX transactions. Other widely traded Euro pairs include EUR/JPY at 4%, EUR/GBP at 3%, and EUR/AUD at 2%.

The ECB and Its Impact on the Euro

The European Central Bank, headquartered in Frankfurt, Germany, acts as the reserve bank for the Eurozone and is responsible for setting interest rates and conducting monetary policy. Its primary objective is to maintain price stability, which involves controlling inflation or, when necessary, supporting growth. The ECB’s main policy lever is its benchmark interest rate: higher rates – or expectations of higher rates – typically support the Euro, while lower rates tend to weigh on the currency.

Monetary policy decisions are taken by the ECB Governing Council, made up of the heads of national central banks in the Eurozone and six permanent members, including ECB President Christine Lagarde. The Council meets eight times per year to determine policy direction.

How Inflation Data Moves the Euro

Inflation in the Eurozone is measured by the Harmonized Index of Consumer Prices (HICP). When inflation rises more than anticipated, especially above the ECB’s 2% target, the central bank is pushed toward raising interest rates to restore price stability. Higher relative interest rates usually support the Euro by making Eurozone assets more attractive to global investors.

Role of Economic Data in Euro Performance

Economic releases serve as gauges of the Eurozone’s health and can significantly influence the Euro. Key indicators include GDP, Manufacturing and Services Purchasing Managers’ Indexes (PMIs), labor-market data, and consumer sentiment surveys. Strong data tend to be positive for the Euro, both by encouraging capital inflows and by potentially prompting the ECB to raise rates. Conversely, weaker data generally weigh on the currency.