Why is EUR/USD under pressure amid mixed Eurozone data and a hawkish Fed?

• A three-week decline looks set for EUR/USD, with the pair trading just above its 19-month low of 1.1045.
• Weak job creation and disappointing Trade Balance figures temper the Eurozone’s better-than-expected Q3 economic growth.
• Growing bets on a 50-basis-point Fed rate increase in December fuel broad-based gains in the US Dollar.

Broad US Dollar (USD) strength keeps the Euro (EUR) under pressure on Friday, leaving EUR/USD only a few pips above its 19-month low of 1.1045 and heading for a third consecutive weekly decline. Mixed Eurozone economic releases have offered little support, while expectations of a sizeable Federal Reserve (Fed) rate increase next month have driven US Treasury yields sharply higher.

Preliminary Gross Domestic Product (GDP) figures published earlier on Friday showed that the Eurozone’s quarterly expansion quickened to 0.6% in the third quarter. Annual growth, meanwhile, held at 1.3%, matching the previous quarter’s pace.

Weaker-than-forecast employment growth and disappointing trade balance figures have nevertheless restrained investor optimism. Following a 0.1% increase in Q2, preliminary Q3 Employment Change figures registered another 0.1% rise, falling short of expectations for an acceleration to 0.2%.

September’s Trade Balance deficit narrowed to EUR 10.3 billion from EUR 16.6 billion in August. Despite that improvement, the shortfall was more than double the EUR 4.5 billion anticipated by the market.

Why are Fed rate hike bets lifting short-end yields and the Dollar?

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

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

ING experts describe the rapid shift in interest rate expectations that has favoured the Dollar: “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,”

Friday’s US economic calendar centres on the October Producer Price Index (PPI), which is expected to provide further evidence of elevated price pressures and strengthen the case for the Fed to increase borrowing costs. The headline inflation rate is forecast to pick up to 6.6% year-on-year (Y-o-Y), compared with 6.3% in September. Core inflation, by contrast, is expected to hold at the previous month’s 5% Y-o-Y pace.