Euro gathers strength to near 1.1250 on Democrat win, hot Eurozone inflation
- EUR/USD gains ground to the highest in almost a month, around 1.1245, in Thursday’s early Asian session.
- Democrats seized control of both the Senate and House of Representatives in US midterm elections.
- Eurozone inflation hits 4% for the first time in three years.
The EUR/USD pair gathers strength to near 1.1245 during the early Asian trading hours on Thursday. The US Dollar (USD) weakens against the Euro (EUR) as the Democrats take control of the US Congress in midterm elections. Germany’s Factory Orders data for September is due later on Thursday.
The Democrats win a majority in both the US Senate and House of Representatives on Tuesday, taking control from Republicans. This achieved major victories in several Republican strongholds for the first time in decades, as tens of millions of voters delivered a sharp rebuke 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.
Harmonized Index of Consumer Prices (HICP) inflation in the Eurozone jumped to 4.0% in October, its highest level in three years, a flash estimate showed on Wednesday. This figure followed a rise of 3.8% in September and came in line with the market expectations. This report marked the first time inflation in the Eurozone has hit or exceeded the 4% threshold since September 2023's reading of 4.3%.
The European Central Bank (ECB) left its key interest rate at 2.5% last month, following a hike of 25 basis points (bps) in September. Markets are now pricing in nearly a 72.0% odds of a hike at the ECB’s final meeting of the year in December, up from 71.8% chance before inflation print, according to CNBC.
Eurozone data firm but ECB officials flag risk of December tightening
Analysts at Scotiabank note that the latest Eurozone data were mixed but broadly resilient, with “Eurozone October CPI … confirmed at 4.0% Y/Y (2.5% for core)” even as “final Eurozone Services and Composite PMIs were marked down slightly to 51.4 and 51.7 respectively on downward revisions to French data.” On the policy front, Scotiabank highlights a notably hawkish tone from ECB officials: “ECB Governor Nagel said Tuesday the inflation picture has worsened and that policy would probably have to be tightened in December.” They add 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 flags likely December hike as inflation risks intensify
ECB’s Nagel delivers a more hawkish message than usual, with an FXS Speechtracker score of 8.2 versus a historic 7.0, as a December rate hike is described as “very likely” amid inflation pressures that are already nearing an adverse scenario. The insistence that the ECB “can and must” prevent an energy shock from morphing into broad-based inflation underscores a strong tightening bias that should underpin the Euro on rate expectations.
Nagel’s confidence that France will resolve budget issues, coupled with the remark that this is “not a task for monetary policy,” signals a clear division between fiscal and monetary responsibilities, reinforcing the case for the ECB to stay focused on price stability. For FX markets, the combination of higher-than-expected inflation and explicit openness to further tightening tilts risks toward a firmer Euro, especially if incoming data validate the adverse-scenario narrative into December.
Technical Analysis: EUR/USD remains capped under the 100-day SMA
In the daily chart, EUR/USD remains capped in the broader context as it stays below the 100-day Simple Moving Average (SMA), keeping the medium-term tone bearish despite the recent rebound. Price is edging just under the upper Bollinger Band, while holding above the Bollinger 20-day SMA, suggesting a short-term recovery within a still-dominant downside structure. The Relative Strength Index (RSI) at 50.9 has normalized from prior oversold territory, hinting that selling pressure has eased but not yet turned into a convincing bullish trend.
On the topside, immediate resistance is located at the upper Bollinger Band around 1.1262, with a more meaningful barrier at the 100-day SMA at 1.1420, which should limit gains unless decisively reclaimed. On the downside, initial support is provided by the Bollinger 20-day SMA near 1.1195, ahead of the lower Bollinger Band around 1.1130, where the recent recovery cycle would likely be challenged if bears regain control.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.