Euro strengthens towards 1.1250, supported by Democrat victory and elevated Eurozone inflation

• Trading around 1.1245 early in Thursday’s Asian session, EUR/USD climbs to its strongest level in almost a month.
• Both the Senate and House of Representatives came under Democratic control following the US midterm elections.
• For the first time in three years, Eurozone inflation reaches 4%.

With Germany’s September Factory Orders figures due later on Thursday, EUR/USD advances towards 1.1245 in early Asian trading. The Euro (EUR) strengthens against the US Dollar (USD) following the Democrats’ capture of Congress in the US midterm elections.

Tuesday’s vote handed the Democrats majorities in both the US Senate and House of Representatives, displacing the Republicans. Tens of millions of voters delivered a sharp rebuke to President Donald Trump, with the Democrats securing major victories 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," adding: “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,”

At 4.0% in October, Eurozone inflation as measured by the Harmonised Index of Consumer Prices (HICP) reached a three-year high, according to Wednesday’s flash estimate. Up from 3.8% in September, the reading matched market expectations. Not since September 2023, when inflation stood at 4.3%, had the Eurozone recorded a rate at or above 4%.

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

Resilient Eurozone data accompany ECB warnings of December tightening

Scotiabank analysts describe the latest Eurozone figures as mixed but broadly resilient. 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.” Turning to policy, the analysts point 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.” They also cite 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.”

Mounting inflation risks prompt Nagel to signal likely December rate rise

An FXS Speechtracker score of 8.2, against a historical 7.0, reflects a more hawkish message than usual from the ECB’s Nagel. With inflation pressures already approaching an adverse scenario, a December rate increase is described as “very likely”. His insistence that the ECB “can and must” stop an energy shock developing into broad-based inflation points to a strong tightening bias, which should support the Euro through interest rate expectations.

By expressing confidence that France will resolve its budget problems while stating that this is “not a task for monetary policy,” Nagel draws a clear line between fiscal and monetary responsibilities. That distinction strengthens the argument for the ECB to maintain its focus on price stability. In currency markets, inflation above expectations and an explicit willingness to tighten policy further skew the risks towards a stronger Euro, particularly if forthcoming figures support the adverse-scenario assessment heading into December.

Technical Analysis: 100-day SMA continues to constrain EUR/USD

Despite its recent rebound, EUR/USD retains a bearish medium-term bias on the daily chart, with the pair still trading below the 100-day Simple Moving Average (SMA). Prices sit just beneath the upper Bollinger Band but above the Bollinger 20-day SMA, pointing to a near-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. This suggests selling pressure has moderated, without yet giving way to a convincing bullish trend.

The upper Bollinger Band, around 1.1262, presents the first resistance level. Beyond that, the 100-day SMA at 1.1420 represents a more substantial obstacle and should restrain advances unless the pair decisively regains it. Initial support lies near 1.1195 at the Bollinger 20-day SMA, followed by the lower Bollinger Band around 1.1130. A return to bearish control would likely test the recent recovery at that lower level.

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