Euro falls below 1.1200 as Fed rate hike expectations rise following stronger US inflation

• Stronger-than-forecast US inflation lifts demand for the US Dollar, sending EUR/USD lower on Tuesday.
• October’s 0.4% rise in US consumer prices surpassed the 0.3% forecast, with core inflation still elevated.
• A December interest rate increase by the Federal Reserve now carries a 99% market-implied probability, underscoring the monetary policy divergence with the Eurozone.

Stronger-than-forecast United States (US) inflation has bolstered expectations of further Federal Reserve (Fed) tightening and supported the US Dollar (USD), pushing EUR/USD below the psychological 1.1200 mark. The pair continues to retreat on Tuesday and trades at around 1.1190 at the time of writing, a decline of 0.28% on the day.

Tuesday’s release from the Bureau of Labor Statistics (BLS) showed that the US Consumer Price Index (CPI) increased by 0.4% MoM in October. While this exceeded the 0.3% market forecast, it represented a slowdown from September’s 0.6% rise. Excluding volatile food and energy prices, Core CPI advanced 0.3%, matching the previous month’s reading and surpassing expectations of 0.2%.

Concerns that price pressures remain entrenched in the US economy have been heightened by the inflation overshoot, adding weight to the case for further interest rate rises. Tracking the Greenback against a basket of six major currencies, the US Dollar Index (DXY) is up 0.3% on Tuesday at around 102.00 at the time of publication. That advance adds to the pressure on EUR/USD.

The probability of a 25-basis-point (bps) increase at the Fed’s December meeting has risen to 99%, from 84% a day earlier, according to the CME FedWatch tool. If delivered, the increase would take the federal funds target range to 4.00%-4.25%.

A Reuters survey conducted between November 6 and 10 points to the same outcome: all 101 economists surveyed expect a 25-basis-point rise at the December 9 meeting. Views on the policy path thereafter are less certain. Of the respondents, 56 believe December will bring the current tightening cycle’s final increase, whereas 45 predict at least two further rises.

Further support for tightening came from Fed Governor Christopher Waller on Tuesday. He signalled his backing for a 25-basis-point rise in December even if inflation eased. Should monthly core inflation hold at around 0.3% or above, he added, a more forceful policy response could be required, suggesting that a 50-basis-point increase should also be under consideration.

Improved sentiment towards European sovereign debt is providing some support for the Euro (EUR). From around 175 basis points at its October peak, the yield spread between French and German 10-year government bonds has narrowed to approximately 145 basis points. The currency’s appeal nevertheless remains constrained by political uncertainty and continuing budgetary challenges in France.

For the European Central Bank (ECB), Chief Economist Philip Lane signalled that a further December rate rise would be prudent provided economic conditions stayed broadly unchanged. His outlook also sees Eurozone inflation ending the year slightly above 4%, while underlying price pressures could intensify.

The US Dollar currently retains the advantage as stronger US inflation and the near-certainty of another Fed rate increase outweigh the ECB’s relatively hawkish signals. As investors reconsider the interest rate outlook on either side of the Atlantic, growing attention to persistent US price pressures could keep EUR/USD under pressure.

EUR/USD Remains Under Pressure in Technical Analysis

Trading at 1.1189 on the four-hour chart, EUR/USD retains a mildly bearish short-term outlook. It remains beneath both the 100-period simple moving average (SMA) at 1.1196 and the 200-period SMA at 1.1227. Failure to recover these moving averages suggests that rallies remain constrained for now. Meanwhile, a Relative Strength Index (RSI) reading near 47 points to weakening momentum rather than outright oversold conditions.

Any recovery would first encounter resistance around 1.1196 at the 100-period SMA, ahead of the 200-period SMA near 1.1227. The recent horizontal ceiling near 1.1275 presents a stronger obstacle. Should selling pressure persist, the next significant support lies at the horizontal level around 1.1100, where buyers may seek to defend the broader trading range.

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