EUR/USD fell as the US dollar posted its best daily performance since the September FOMC meeting. Strong jobs data raised bets on a December Fed rate rise, and the Democrats' midterm victory added support for the greenback, according to the FxPro Analyst Team.
The US dollar recorded its best daily performance since the September FOMC meeting, when the federal funds rate was raised. The main drivers were a 165K increase in nonfarm payrolls and a fall in the unemployment rate from 4.2% to 4.1%. According to the analysts, the strong labour market allows the Fed to continue its cycle of monetary tightening.
Rate expectations climb after the jobs report
CME derivatives indicate a 76% probability of a rate rise in December, up from 66% before the October employment report. The probability of two tightening moves within the next 12 months has risen from 52% to 63%.
Subdued inflation forecasts limited the damage, however. The slump in EURUSD could have been even more severe without them, the analysts say. Bloomberg analysts expect October consumer prices to slow from 0.6% to 0.3%, and the core inflation rate from 0.3% to 0.2% month on month.
Midterm elections shift the Trump premium
Investors continue to digest the midterm election results. Stock indices and oil prices have stabilised, while the dollar has strengthened significantly. The analysts say these assets had priced in a Trump premium. Expectations of an escalation of the conflict in the Middle East had pushed Brent to six-month highs, and the Democrats' victory brought crude back down.
The dollar, by contrast, was not popular in the White House. The analysts note that the President has repeatedly asserted that the greenback's strength undermines the competitiveness of American manufacturers. They add that differing Fed and ECB policy paces, diverging growth between the United States and the eurozone, and the French budget crisis suggest EURUSD should have traded significantly lower.
Trump's dissatisfaction with the strong currency and high interest rates restrained the bears, according to the analysts. The Democrats' victory undermines the President's authority and gives the dollar a tailwind.
Source: ActionForex
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