Brighter risk sentiment helps euro trim losses despite weak German data

• A recovery from Friday's lows near 1.1130 takes EUR/USD towards 1.1200.
• AI-related concerns have receded at the start of the week, helped by lower Oil prices and continuing diplomatic initiatives to end the US-Iran war.
• Dollar declines are likely to be capped by robust US economic readings and expectations of Fed tightening.

A modest improvement in risk appetite supports the Euro (EUR) as the week begins quietly, outweighing disappointing German Trade Balance figures published earlier on Monday. The currency has gained about 0.4% against the US Dollar (USD). At the time of writing, EUR/USD trades around 1.1190, above Friday’s high of 1.1130.

Moderate gains across the main European equity indices reflect a cautiously upbeat start to the week. Concerns over AI have subsided, at least temporarily, while diplomatic initiatives aimed at ending the Middle East conflict remain under way. With Brent Oil consolidating below the key $100 mark, the Eurozone’s Oil-importing economies are receiving significant relief.

Despite weaker-than-expected German Trade Balance data released earlier on Monday, the positive market mood has prevailed. According to Destatis, Germany's trade surplus shrank from EUR 17.8 billion in August to EUR 15.6 billion in September, falling short of the EUR 19.2 billion surplus expected. Imports rose far more than exports.

Why is the safe-haven USD sliding despite strong NFP data and Fed tightening expectations?

Friday's US Nonfarm Payrolls release exceeded forecasts: net employment rose by 165K against market expectations of a 65K increase. The Unemployment rate, meanwhile, fell to 4.1%.

Following the release, markets grew more confident that the Federal Reserve (Fed) would raise interest rates again at its December meeting. Later that day, New York Fed President John Williams, St. Louis Fed President Alberto Musalem and San Francisco Fed President Mary Daly supported that view.

In a note, Commerzbank Research analysts point out that “of the 18 Fed officials who submitted projections for the appropriate path of interest rates in September, 16 anticipated at least one more rate hike this year (...)” The bank adds that “the data released since then are unlikely to have changed that assessment materially,”

Why does a solid US labour market support Fed rate hike expectations?

Scope for further Federal Reserve tightening remains intact following recent data, according to analysts at Commerzbank Research, who observe that “on balance, the U.S. labor market remains solid and poses no obstacle to further interest rate hikes.” Highlighting policymakers’ September projections, the bank notes that “of the 18 Fed officials who submitted projections for the appropriate path of interest rates in September, 16 anticipated at least one more rate hike this year,” adding its assessment that “the data released since then are unlikely to have changed that assessment materially.”