Euro falls to the lowest level in a year while the US publishes inflation figures!
The euro continued to weaken against the US dollar, hitting a one-year low after the United States released the October Consumer Price Index (CPI), which revealed a rise in inflation from last month. The EUR/USD pair fell to 1.0546 at 4:52 a.m. Thursday, the lowest level seen since Nov. 1, 2023. Inflation in the U.S., along with Trump's recent election victory, has weighed heavily on the euro, causing a 5.7% decline against the dollar since the end of September.
On Wednesday, US Republicans narrowly secured a majority in the House of Representatives, giving Trump's party full control of Congress, increasing the likelihood that his policies will be passed. This has added to concerns about inflation risks, pushing up US government bond yields and adding further strength to the US dollar.
In October, US headline inflation rose 2.6% year-on-year, up from 2.4% in the previous month, marking the first increase since March. Meanwhile, core inflation, which excludes volatile food and energy prices, rose 0.3% month-on-month and 3.6% year-on-year, marking the fastest rate of growth since April.
These data suggest that inflationary pressure in the United States remains persistent, signaling that the Federal Reserve's fight against inflation may not be over. Despite this, markets still expect the Fed to implement another rate cut in December, although the cut could remain modest at 25 basis points.
In September, the Fed made a major 50 basis point rate cut amid concerns about a cooling labor market and slowing inflation. The rate cut initially weakened the dollar, allowing the euro to rise to a 14-month high. However, with the US labor market remaining resilient, inflation holding strong and a renewed Trump-led "Trade" push boosting the dollar, markets have reversed course.
Rising inflation expectations have contributed to a further rise in US government bond yields, particularly long-term Treasury bills. The yield on the 10-year Treasury rose to 4.47%, its highest close since July 1.
While short-term bond yields (under two years) are more closely related to the immediate outlook for interest rates, longer-term yields reflect the market's expectations of broader economic conditions, inflation and central bank policy. This rise in long-term yields suggests that bond traders expect a strong US economy with continued inflation and higher interest rates, all of which favor a stronger dollar.
Michael McCarthy, market strategist and COO at Moomoo Australia predicts the US dollar will continue to strengthen amid rising bond yields. "This could fuel a longer rally in the USD as local and global investors move to those more attractive sovereign yields," he explained.
Wall Street's Trump-fueled rally lost some steam on Wednesday, though McCarthy notes that may not affect the dollar. "In other words, the post-election enthusiasm for all things dollar may continue and even accelerate, even if optimism fades and stocks fall with it," he added.
The euro is expected to remain under pressure against other major currencies due to a gloomy economic outlook and ongoing political uncertainties in Europe.
A potential trade war between the US and its main trading partners, including China and the EU, could add to the need for a weaker euro to support European exports. In other words, there are few fundamental factors supporting a stronger euro, making a turnaround unlikely in the near future.
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