Euro rebounds as falling US yields outweigh hotter-than-expected PPI

• The Euro strengthens against the US Dollar as Treasury yields fall to three-week lows.
• Hotter US producer inflation and resilient consumer spending support a hawkish Fed outlook.
• Cautious ECB commentary and French debt concerns keep the Euro's recovery in check.

EUR/USD trades on the front foot on Thursday as falling US Treasury yields weigh on the US Dollar (USD). However, the Euro’s (EUR) upside appears limited as stronger-than-expected US economic data reinforce hawkish Federal Reserve (Fed) expectations. At the time of writing, the pair trades around 1.1214, up 0.52% on the day, after reaching an intraday high of 1.1241.

US Treasury yields decline across the curve as mounting concerns over AI-related investments weigh on global equities and push investors toward government bonds. The benchmark 10-year US Treasury yield falls over 10 basis points (bps) to 5.04%, its lowest level in three weeks. Meanwhile, the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, eases toward 102 after climbing to 102.94 the previous day.

Data released on Thursday showed that the Producer Price Index (PPI) rose 1.3% MoM in September, well above the 0.5% forecast and August’s upwardly revised 0.5% increase. Annual producer inflation accelerated to 6.3% from an upwardly revised 5.6%, exceeding expectations of 5.3%.

Core PPI, which excludes food and energy, also surprised to the upside, rising 0.7% MoM and 5.0% YoY against forecasts of 0.3% and 4.4%, respectively. Separately, Retail Sales increased 0.8% MoM, beating the 0.3% estimate, following an upwardly revised 1.3% rise in August. Weekly Initial Jobless Claims stood at 199K, slightly below the 200K forecast.

The releases follow Wednesday’s hotter-than-expected Consumer Price Index (CPI) report, which showed headline inflation accelerating to 3.7% in September, above forecasts of 3.6%, while core inflation rose to 2.6%, exceeding expectations of 2.5%.

Against this backdrop, traders widely expect the Fed to deliver another interest rate hike before year-end as it seeks to bring inflation back toward its 2% target. That prospect could cushion the US Dollar and limit the scope for a sustained EUR/USD recovery.

However, an increase at the October 27-28 meeting remains less likely, as recent Fed communication suggests policymakers are cautious about delivering back-to-back rate hikes. The CME FedWatch Tool shows traders pricing in around a 90% chance of a rate hike by December.

Across the Atlantic, France’s fiscal and political concerns remain another headwind for the Euro, while cautious remarks from European Central Bank (ECB) officials temper expectations of an imminent rate hike.

ECB Governing Council member Martins Kazaks said on Thursday that the “ECB is in no immediate need to rush on rates,” although “inflationary forces still stronger in immediate future.” Álvaro Santos Pereira said the “positive news is inflation is not spreading,” but warned that “if inflation widens, central banks will be compelled to respond.”