Hotter US inflation strengthens Fed rate hike bets, pushing Euro below 1.1200

• Demand for the US Dollar strengthens after US inflation exceeds expectations, pushing EUR/USD lower on Tuesday.
• Elevated core inflation persists as US consumer prices climb 0.4% in October, against a forecast of 0.3%.
• Monetary policy divergence with the Eurozone is reinforced as markets price in a 99% probability of a Federal Reserve rate increase in December.

Selling pressure keeps EUR/USD below the psychological 1.1200 mark on Tuesday, with the pair trading near 1.1190, a decline of 0.28% on the day at the time of writing. The latest leg lower follows an above-forecast inflation release from the United States (US). The data bolsters the US Dollar (USD) by strengthening expectations that the Federal Reserve (Fed) will tighten monetary policy further.

October's US Consumer Price Index (CPI) increased 0.4% MoM, according to figures released on Tuesday by the Bureau of Labor Statistics (BLS). While the rise outpaced the market forecast of 0.3%, it was slower than September's 0.6% increase. Excluding volatile food and energy prices, Core CPI advanced 0.3%, matching the previous month's reading and exceeding expectations of 0.2%.

Concerns that price pressures remain entrenched in the US economy have gained weight following the inflation surprise, adding to the argument for further interest rate increases. At the time of publication, the US Dollar Index (DXY) is trading near 102.00, up 0.3% on Tuesday. The index, which tracks the Greenback against a basket of six major currencies, is adding to the downward pressure on EUR/USD.

Financial markets have raised the probability of a 25-basis-point (bps) increase at the Fed's December meeting to 99%, from 84% a day earlier, according to the CME FedWatch tool. An increase of that size would take the federal funds target range to 4.00%-4.25%.

A Reuters survey carried out from 6 to 10 November points to similar expectations: all 101 economists forecast a 25-basis-point increase at the 9 December meeting. Views on the policy path beyond that meeting are less settled. While 56 respondents expect December's increase to conclude the current tightening cycle, 45 anticipate at least two further hikes.

Further tightening also received backing from Fed Governor Christopher Waller on Tuesday. He signalled support for a 25-basis-point increase in December even if inflation eased. Should monthly core inflation stay around 0.3% or higher, however, he said a more forceful policy response could be needed, indicating that a 50-basis-point increase should also be considered.

Improving sentiment towards European sovereign debt is offering the Euro (EUR) some support. From its October peak of around 175 basis points, the yield spread between French and German 10-year government bonds has narrowed to approximately 145 basis points. France's continuing political uncertainty and budgetary difficulties nevertheless remain a constraint on the European currency's appeal.

Turning to European monetary policy, European Central Bank (ECB) Chief Economist Philip Lane said a further interest rate increase in December would be prudent provided economic conditions stayed broadly unchanged. In his view, Eurozone inflation is likely to end the year slightly above 4%, while underlying inflationary pressures could intensify.

For now, the US Dollar retains support from the stronger US inflation readings and the near-certainty of a further Fed rate increase, despite the ECB's comparatively hawkish signals. As investors reconsider the interest rate outlook on both sides of the Atlantic, growing attention to persistent US price pressures could keep EUR/USD under pressure.

EUR/USD technical analysis: Can the pair reclaim its moving averages?

A mildly bearish short-term outlook persists on the four-hour chart, where EUR/USD trades at 1.1189. The pair remains beneath both the 100-period simple moving average (SMA) at 1.1196 and the 200-period SMA at 1.1227. Failure to recover above these overhead averages indicates that upside moves remain constrained for now. Meanwhile, a Relative Strength Index (RSI) reading near 47 points to weakening momentum rather than outright oversold conditions.

The 100-period SMA around 1.1196 provides the first upside resistance, ahead of the 200-period SMA near 1.1227. Beyond these averages, the recent horizontal ceiling near 1.1275 presents a stronger hurdle. If selling pressure deepens, the next significant support lies at the horizontal level around 1.1100, where buyers may attempt to protect the broader trading range.

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