14 Nov 2024

EUR/USD has declined to approximately 1.0500 as the US Dollar continues its upward trajectory following Republican victories in both chambers of Congress. The acceleration of US inflation in October was anticipated, leading to heightened expectations for a potential interest rate reduction in December. Investors are keenly awaiting Federal Reserve Chair Jerome Powell's address on Thursday for further insights on interest rate policy.

During European trading hours, EUR/USD reached a new annual low close to 1.0500, marking its fifth consecutive day of losses. The major currency pair has experienced significant selling pressure as the US Dollar (USD) maintains its upward momentum, largely benefiting from the election of President Donald Trump. The US Dollar Index (DXY), which measures the Greenback's strength against six key currencies, has risen to nearly 106.80, the highest level recorded since November 1, 2023.

With Republicans securing control of both the Senate and the House of Representatives, it is expected that Trump will find it easier to advance his agenda, which includes reducing taxes for businesses and individuals, as well as imposing higher import tariffs, as reported by the Associated Press.

An increase in import tariffs would likely elevate the demand for goods and services produced domestically, thereby intensifying inflationary pressures. This situation could constrain the Federal Reserve's ability to implement more aggressive interest rate cuts.

On Wednesday, the US dollar experienced a significant rise following the release of the Consumer Price Index (CPI) data for October. The inflation report indicated that price pressures increased as anticipated, both on a monthly and annual basis, which heightened expectations for interest rate reductions during the December meeting. The CME FedWatch tool revealed that the likelihood of the Fed reducing interest rates by 25 basis points (bps) to a range of 4.25%-4.50% next month surged to 83%, up from 59% the previous day.

During Thursday's session, market participants will closely monitor comments from Fed Chair Jerome Powell, who will participate in a panel discussion organized by the Federal Reserve Bank of Dallas at 20:00 GMT. Investors are eager to gain insights into his views regarding the monetary policy decision for December and the long-term implications of Trump's policies.

From an economic perspective, attention will be directed towards the US Initial Jobless Claims for the week ending November 8, as well as the Producer Price Index (PPI) data for October, which is scheduled for release at 13:30 GMT.

In the daily market update, the EUR/USD pair is experiencing downward pressure due to the Euro's prolonged underperformance against its major counterparts. The Euro is facing challenges following Trump's victory in the US presidential election and the recent collapse of the three-party coalition government in Germany, triggered by Chancellor Olaf Scholz's dismissal of Finance Minister Christian Lindner on November 6. The anticipated implementation of Trump's tariffs on the Eurozone is expected to significantly impact its export sector, potentially hindering overall GDP growth and leading to further depreciation of the Euro. Major financial institutions, including JPMorgan and Deutsche Bank, suggest that a decline to parity could occur, contingent upon the severity of the tariffs. Additionally, tax cuts may exacerbate inflation in the US, further constraining the Federal Reserve's options.

Expectations that European inflation will remain manageable have led to anticipations of further interest rate reductions by the European Central Bank (ECB). On Tuesday, Olli Rehn, a member of the ECB Governing Council and Governor of the Bank of Finland, remarked that the Deposit Rate might fall below the neutral rate in the first half of 2025. The ECB staff estimates that the neutral rate is approximately between 2% and 2.25%.