EUR/USD stays under pressure as mixed Eurozone data meet a hawkish Fed

• EUR/USD remains just above its 19-month low of 1.1045 as a third consecutive week of selling draws to a close.
• Despite stronger-than-forecast Eurozone growth in Q3, employment gains stayed subdued and Trade Balance figures fell short of expectations.
• Growing bets on a 50-basis-point Fed rate rise in December propel the US Dollar sharply higher across the board.

Mixed Eurozone economic releases have failed to counter broad US Dollar (USD) strength, leaving the Euro (EUR) nursing further losses on Friday. Speculation over a sizeable Federal Reserve (Fed) rate increase next month has sent US Treasury yields sharply higher. With EUR/USD trading only a few pips above its 19-month low of 1.1045, the pair is heading for a third successive weekly decline.

Preliminary Gross Domestic Product (GDP) figures published earlier on Friday put third-quarter Eurozone growth at 0.6%, marking an acceleration. On an annual basis, the economy expanded by 1.3%, matching the previous quarter’s pace.

Weaker-than-forecast employment growth and disappointing trade balance figures have nevertheless tempered investor optimism. The preliminary Q3 Employment Change reading showed a 0.1% increase, matching Q2 rather than picking up to the 0.2% anticipated.

September’s Trade Balance, meanwhile, recorded a deficit of EUR 10.3 billion. Although narrower than August’s EUR 16.6 billion gap, the shortfall was more than twice the EUR 4.5 billion expected by the market.

Dollar rallies as Fed rate rise bets lift short-dated yields

A sharp rebound in US Dollar yields continues to underpin demand for the currency. Federal Reserve (Fed) policymakers have signalled that an outsized rate increase remains possible at the December meeting.

ING analysts link the currency’s advance closely to a substantial reassessment of the Fed’s near-term policy outlook, observing that “This week has seen a powerful, macro-driven rally in the Dollar,”

Explaining the rapid shift in rate expectations in the Dollar’s favour, ING experts note: “Short-dated US yields are close to 40bp higher since Tuesday morning, when the Fed's Christopher Waller mused over the need for a 50bp hike in December,” They add that “the market has since adopted the view that back-to-back December and January hikes look likely,”

October’s Producer Price Index (PPI) is the main release on Friday’s US economic calendar. It is expected to provide further evidence of elevated price pressures in the US economy, reinforcing the case for the Fed to increase borrowing costs. Forecasts point to headline inflation accelerating to 6.6% year-on-year (Y-o-Y), up from 6.3% in September. Core inflation, by contrast, is expected to hold at the previous month’s 5% Y-o-Y rate.