US Dollar steadies after election-driven volatility as Euro momentum fades

• EUR/USD retreats as the US Dollar rebounds following its post-election sell-off.
• December rate hike expectations strengthen on low US Jobless Claims and hawkish Fed comments.
• Faster Eurozone producer inflation accompanies market pricing for further ECB tightening.

US Initial Jobless Claims came in below expectations, helping the US Dollar (USD) recover from its post-election sell-off and pushing EUR/USD into negative territory on Thursday. Hawkish comments from Federal Reserve (Fed) officials also support the Greenback’s recovery. Having reached an intraday high of 1.1268, the pair has eased to around 1.1220 at the time of writing.

Wednesday’s Democratic sweep of Congress prompted expectations that a divided government would deliver less fiscal expansion. Treasury yields declined as a result, while the Greenback dropped to five-week lows. After touching an intraday low of 101.20, the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, has recovered to around 101.60.

The prospect of Congress curbing funding for President Donald Trump’s military campaign against Iran and stepping up pressure to end the war also shaped traders’ positioning. Oil prices fell sharply in response, but remain well above pre-war levels, leaving inflation risks in place.

With inflation “too high, moving in the wrong direction.” Cleveland Fed President Beth Hammack said on Thursday that “monetary policy needs to move to a restrictive stance”. For Richmond Fed President Thomas Barkin, inflation remained the Fed’s most important risk. He said, “I do not anticipate inflation will accelerate, but also don’t see it falling at this point.” Gradual tightening, he added, “makes sense.”

US Initial Jobless Claims dropped from 194K to 189K, compared with expectations of 196K. The four-week moving average also edged down, from 196.75K to 194.75K. These figures, alongside the officials’ comments, strengthen expectations that the Fed will raise rates again in December. Friday’s Nonfarm Payrolls (NFP) report is now the focus for further indications of the Fed’s policy direction.

In the Eurozone, September’s Producer Price Index (PPI) inflation increased from 2.0% to 2.5% MoM, with the annual rate climbing from 8.3% to 11.1%. With inflation risks still skewed to the upside, traders also expect the European Central Bank (ECB) to deliver another rate rise in December.

Although inflation had risen further in October, ECB Governing Council member Ante Zigman cautioned that it was “too early to say how much more tightening is needed.”