Euro advances towards 1.1250 as Democrat win and hot Eurozone inflation lend support

Buying interest lifts EUR/USD to around 1.1245 in early Asian trading on Thursday, its strongest level in almost a month.
The US midterm elections handed Democrats control of the Senate as well as the House of Representatives.
For the first time in three years, Eurozone inflation reaches 4%.

Dollar weakness supports EUR/USD near 1.1245 in Thursday’s early Asian session. The US Dollar (USD) loses ground against the Euro (EUR) following the Democrats’ takeover of the US Congress in the midterm elections. Later on Thursday, Germany will release its September Factory Orders data.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Control of both chambers of the US Congress shifted from Republicans to Democrats on Tuesday, with the latter securing majorities in the Senate and House of Representatives. Tens of millions of voters delivered a sharp rebuke to President Donald Trump, helping Democrats achieve major victories in several Republican strongholds for the first time in decades.

Carol Kong, currency strategist at Commonwealth Bank of Australia, said: "Given the Democrats are favoured right now, our expectation is that they will take control of both the House and the Senate," Carol added: “If that pans out, the US dollar could sell off further from here, because a Democratic sweep would limit government spending over Trump's term,”

A flash estimate released on Wednesday put Eurozone Harmonised Index of Consumer Prices (HICP) inflation at 4.0% in October, a three-year high. Matching market expectations, the reading followed September’s increase of 3.8%. Eurozone inflation had not reached or surpassed 4% since September 2023, when it stood at 4.3%.

After raising its key interest rate by 25 basis points (bps) in September, the European Central Bank (ECB) kept it unchanged at 2.5% last month. According to CNBC, markets now assign nearly a 72.0% probability to a rate increase at the ECB’s final meeting of the year in December, compared with 71.8% before the inflation release.

Do resilient Eurozone data strengthen the case for December ECB tightening?

Recent Eurozone releases present a mixed but broadly resilient picture, according to Scotiabank analysts. They point to “Eurozone October CPI … confirmed at 4.0% Y/Y (2.5% for core)” alongside “final Eurozone Services and Composite PMIs were marked down slightly to 51.4 and 51.7 respectively on downward revisions to French data.” Scotiabank also draws attention to the distinctly hawkish policy signals from ECB officials: “ECB Governor Nagel said Tuesday the inflation picture has worsened and that policy would probably have to be tightened in December.” The analysts further note that his colleague “Sleijpen said the Iran shock was more persistent than had been thought – although there were no second-round inflation effects visible at this point – while Governor Kocher said a December rate hike was likely unless circumstances change.”

Do rising inflation risks make a December hike likely, as Nagel signals?

With inflation pressures already approaching an adverse scenario, ECB’s Nagel characterises a December rate increase as “very likely”. His message is more hawkish than usual, registering 8.2 on the FXS Speechtracker against a historical score of 7.0. By stressing that the ECB “can and must” stop an energy shock from spreading into broad-based inflation, he conveys a strong bias towards tightening, which should support the Euro through interest-rate expectations.

A clear separation of fiscal and monetary responsibilities emerges from Nagel’s confidence that France will settle its budget problems and his observation that this is “not a task for monetary policy,”. That distinction strengthens the argument for keeping the ECB’s attention on price stability. In currency markets, inflation above expectations, together with an explicit willingness to tighten policy further, skews risks towards a stronger Euro. This is particularly so if incoming releases support the adverse-scenario narrative heading into December.

Technical Analysis: Can EUR/USD overcome the 100-day SMA ceiling?

Despite its recent rebound, EUR/USD retains a bearish medium-term bias on the daily chart, with the 100-day Simple Moving Average (SMA) still overhead. Trading just below the upper Bollinger Band but above the Bollinger 20-day SMA, the pair shows signs of a near-term recovery within a broader structure still dominated by downside risks. At 50.9, the Relative Strength Index (RSI) has returned to more normal levels from previously oversold territory. This suggests that selling pressure has moderated, without yet establishing a convincing bullish trend.

The upper Bollinger Band near 1.1262 presents the first resistance, followed by the more substantial hurdle of the 100-day SMA at 1.1420. Unless that moving average is decisively reclaimed, it should restrain further gains. Initial support lies around 1.1195 at the Bollinger 20-day SMA, followed by the lower Bollinger Band near 1.1130. A return of bearish control would likely put the recent recovery cycle to the test at that lower level.

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

Common questions about the Euro

Which countries use the Euro, and how widely is it traded?

Used by the 20 European Union countries within the Eurozone, the Euro ranks second only to the US Dollar among the world’s most actively traded currencies. Its share of all foreign exchange transactions stood at 31% in 2022, when average daily turnover exceeded $2.2 trillion. With an estimated 30% share of all transactions, EUR/USD is the world’s most actively traded currency pair. It is followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What role does the ECB play in the Euro’s movements?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s central bank, setting interest rates and conducting monetary policy. Maintaining price stability is its central mandate, pursued by either containing inflation or supporting growth. Interest-rate increases and reductions are its main policy tools. Higher relative interest rates, or expectations of higher rates, generally support the Euro; the reverse also holds. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national central banks and six permanent members, among them ECB President Christine Lagarde.

Why do inflation readings matter for the Euro?

The Harmonised Index of Consumer Prices (HICP), which measures Eurozone inflation, is a key economic gauge for the Euro. Inflation that exceeds expectations, particularly when it is above the ECB’s 2% target, obliges the central bank to increase interest rates to regain control of prices. By making the region a more attractive destination for global investors’ funds, interest rates that are relatively high compared with those of its counterparts generally lend support to the Euro.

Which economic releases can move the Euro?

By indicating the economy’s health, data releases can affect the Euro’s performance. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators that can shape the single currency’s direction. Economic strength supports the Euro by drawing in foreign investment and potentially prompting the ECB to raise interest rates, which directly strengthens the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular importance attaches to releases from Germany, France, Italy and Spain, the euro area’s four largest economies, which together represent 75% of the Eurozone economy.

Why is the Trade Balance important for the Euro?

The Trade Balance is another key release for the Euro, showing the gap between a country’s export earnings and its spending on imports during a specified period. Strong foreign demand for a country’s exports creates additional demand for its currency as overseas buyers seek to purchase those goods, lifting the currency’s value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.