Near 1.1250: Euro strengthens on Democrat victory and high Eurozone inflation

1.1245 marks EUR/USD’s highest level in almost a month. The pair advances in early Asian trading on Thursday.
Both chambers of Congress, the Senate and House of Representatives, came under Democratic control in the US midterm elections.
4% Eurozone inflation marks the first reading at that level in three years.

1.1245 is within reach as EUR/USD strengthens. The advance comes in Thursday’s early Asian session, with the US Dollar (USD) losing ground against the Euro (EUR) after the Democrats secured control of the US Congress in the midterm elections. Later on Thursday, Germany will release its September Factory Orders data.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Tuesday’s elections handed the Democrats majorities in the US Senate and House of Representatives, ending Republican control. Tens of millions of voters delivered a sharp rebuke to President Donald Trump, with Democrats securing major wins in several Republican strongholds for the first time in decades.

Carol Kong, currency strategist at Commonwealth Bank of Australia, said: "Given the Democrats are favoured right now, our expectation is that they will take control of both the House and the Senate," Carol added: “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,”

October Eurozone inflation accelerated to 4.0%, a three-year high, according to Wednesday’s flash Harmonised Index of Consumer Prices (HICP) estimate. The result matched market expectations, following September’s 3.8% increase. Not since September 2023, when inflation stood at 4.3%, had the reading reached or exceeded 4%.

After raising rates by 25 basis points (bps) in September, the European Central Bank (ECB) held its key interest rate at 2.5% last month. CNBC reports that markets now assign nearly a 72.0% probability to a rate increase at the ECB’s final meeting of the year in December. That compares with a 71.8% chance before the inflation release.

4.0% inflation: resilient Eurozone data and December tightening risk

Mixed but broadly resilient is how Scotiabank analysts characterise the latest Eurozone figures. They note 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.” Scotiabank also draws attention to a distinctly hawkish message from ECB officials: “ECB Governor Nagel said Tuesday the inflation picture has worsened and that policy would probably have to be tightened in December.” His colleague, they add, “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.”

8.2 Speechtracker score: Nagel points to likely December hike

An FXS Speechtracker score of 8.2, against a historical 7.0, reflects a more hawkish-than-usual message from ECB’s Nagel. With inflation pressures already approaching an adverse scenario, a December rate rise is described as “very likely”. His insistence that the ECB “can and must” stop an energy shock from becoming broad-based inflation highlights a firm tightening bias. Rate expectations should therefore support the Euro.

Fiscal and monetary responsibilities remain clearly separate in Nagel’s comments. He expresses confidence that France will resolve its budget difficulties, while calling this “not a task for monetary policy,” reinforcing the argument for the ECB to concentrate on price stability. For currency markets, above-expected inflation alongside an explicit willingness to tighten further shifts the balance of risks towards a stronger Euro. That is particularly the case if incoming releases support the adverse-scenario narrative heading into December.

Technical Analysis: 100-day SMA Keeps EUR/USD Capped

Trading below the 100-day Simple Moving Average (SMA), EUR/USD retains a bearish medium-term bias on the daily chart despite its recent rebound. The price sits just beneath the upper Bollinger Band but above the Bollinger 20-day SMA. This points to a short-term recovery within a broader structure still dominated by downside pressure. At 50.9, the Relative Strength Index (RSI) has normalised after previously reaching oversold territory. Selling pressure appears to have faded, without yet giving way to a convincing bullish trend.

The upper Bollinger Band near 1.1262 presents the first upside hurdle. Beyond it, the 100-day SMA at 1.1420 offers more substantial resistance and should restrain advances unless the pair decisively regains that level. Initial downside support lies near 1.1195 at the Bollinger 20-day SMA. The lower Bollinger Band around 1.1130 follows, where a return of bearish control would likely test the recent recovery cycle.

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

Euro: Key Questions

The Euro: Which Countries Use It?

Used by the 20 European Union countries in the Eurozone, the Euro ranks behind only the US Dollar in global currency trading. Its share of all foreign exchange transactions reached 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The ECB: Its Role and Influence on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and directing monetary policy. Maintaining price stability is its core mandate, whether through controlling inflation or stimulating growth. Interest rate increases and cuts are its main policy instrument. Higher rates relative to other economies, or expectations of such rates, generally support the Euro; the reverse generally weighs on it. Monetary policy is decided by the ECB Governing Council, which meets eight times a year. The decision-makers comprise the heads of Eurozone national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation Data: The Implications for the Euro

The Harmonised Index of Consumer Prices (HICP), which measures Eurozone inflation, is a key economic gauge for the Euro. An inflation reading above expectations, particularly one exceeding the ECB’s 2% target, obliges the central bank to increase interest rates to regain control of prices. When rates are higher than those of its counterparts, the Euro usually benefits. The region becomes a more attractive destination for global investors’ funds.

Economic Indicators: What Drives the Euro?

By revealing the economy’s health, data releases can move the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators that can shape the single currency’s direction. Economic strength supports the Euro by drawing in foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Germany, France, Italy and Spain together represent 75% of the Eurozone economy. Releases from these four largest euro-area economies therefore carry particular weight.

Trade Balance: Why It Matters for the Euro

The Trade Balance is another important release for the Euro. Over a specified period, it captures the difference between a country’s export earnings and its import spending. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to purchase those goods. That demand alone lifts the currency’s value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.