EUR/USD refreshes annual lows as Trump locks both US houses

EUR/USD sinks to near 1.0530 as the US Dollar extends its rally as Republicans win both houses in the US.
The US inflation accelerated expectedly in October, which boosted expectations of an interest rate cut in December.
Investors await Fed Jerome Powell’s speech on Thursday for fresh interest rate guidance.

EUR/USD posts a fresh annual low near 1.0530 in European trading hours and extends its losing streak for the fifth trading day on Thursday. The major currency pair has faced an intense sell-off as the US Dollar (USD) continues to enjoy upside momentum, being one of the major beneficiaries of President-elected Donald Trump’s win in the United States (US) presidential election. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, climbs to near 106.80, the highest level seen since November 1, 2023.

It will be easy for Trump to implement the agenda of lower taxes on businesses and workers, as well as high import tariffs, as Republicans have ensured control of the Senate and the House of Representatives, according to the Associated Press.

An increase in import tariffs would increase the demand for domestically produced goods and services, which would boost inflationary pressures that limit the potential of the Federal Reserve (Fed) to cut interest rates faster and deeper.

The Greenback rose sharply on Wednesday after the release of the US Consumer Price Index (CPI) data for October. The inflation report showed that price pressures grew expectedly on a monthly as well as annual basis, boosting expectations of interest rate cuts in the December meeting. According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 4.25%-4.50% next month increased to 83% from 59% a day before.

In Thursday’s session, investors will pay close attention to Fed Chair Jerome Powell’s commentary in a panel discussion hosted by the Federal Reserve Bank of Dallas at 20:00 GMT. Market participants would like to know his stance on December’s monetary policy decision and the impact of Trump's policies in the medium and longer term.

On the economic front, investors will focus on the US Initial Jobless Claims for the week ending November 8 and the Producer Price Index (PPI) data for October, which will be published at 13:30 GMT.

Daily digest market movers: EUR/USD declines as ECB Rehn sees neutral rate coming in first half of 2025

EUR/USD remains on the backfoot amid Euro’s (EUR) more than a week-long underperformance against its major peers. The Euro faces pressure from Trump’s victory in the US presidential election and the collapse of the three-party coalition government in Germany after Chancellor Olaf Scholz sacked Finance Minister Christian Linder on November 6.
The implementation of Trump’s tariffs on the Eurozone is expected to dent its export sector significantly, which could weaken its overall Gross Domestic Product (GDP) growth and result in further depreciation in the Euro.
Big banks, including JPMorgan and Deutsche Bank, reckon a drop to parity could happen, depending on the extent of tariffs. Tax cuts could also fuel US inflation and limit Federal Reserve interest rate cuts, making the Dollar potentially more attractive than the Euro, Reuters reported.
Meanwhile, expectations for the European inflation remaining under control have prompted expectations of more interest rate cuts by the European Central Bank (ECB). ECB Governing Council Member and Bank of Finland Governor Olli Rehn commented on Tuesday that the Deposit Rate could decline the so-called neutral rate in the first half of 2025. According to the ECB staff, the neutral rate is around 2% or 2.25%.

Technical Analysis: EUR/USD sees more downside as all short-to-long-term EMAs turn downwards

EUR/USD slides to its lowest since November 1, 2023, near 1.0530. The major currency pair weakened after breaking below the April 16 low of 1.0600. The outlook of the shared currency pair has become bearish as all short to long-term Exponential Moving Averages (EMAs) are declining.

The 14-day Relative Strength Index (RSI) drops to nearly 30.00, adding to evidence of more weakness in the near term.

Looking down, the pair is expected to find a cushion near the psychological support of 1.0500. On the flip side, the round-level resistance of 1.0700 will be the key barrier for the Euro bulls.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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