• EURUSD hits lowest level since Nov 2023
• US inflation rises 2.6% YoY, in line with expectations
• St Louis Fed head warns of inflation above 2%
• Markets price in 82.5% chance of 25bp rate cut
• EUR faces pressure from German politics and potential US tariffs

EURUSD has hit its lowest level since November 2023, pressured by a stronger dollar following Donald Trump's win of the presidency and a 2.6% rise in inflation last month.

Wednesday's figures from the Bureau of Labor Statistics were in line with what markets have anticipated:

• Core Inflation MoM: 0.3% – Actual & Expected
• YoY Core Inflation: 3.3% – Actual & Expected
• MoM Inflation Rate: 0.2% – Actual & Expected
• YoY inflation: 2.6% – actual & expected (1st increase in 7 month)

Head of the St Louis Fed, sounded a cautionary note in a recent speech, warning that inflation could get stuck above 2% or even rise higher.
 

Meanwhile, he suggested that the likelihood of a sharp downturn in the labour market may be diminishing and reiterated his support for a measured approach to rate cuts.

At the time of writing, markets are pricing in an 82.5% probability of a 25bp cut next month (source: CME FedWatch Tool).

Other factors putting negative pressure on the EUR include:

• Political uncertainty in Germany (– EU's largest economy): following the collapse of Germany's ruling coalition, the country will hold a snap federal election on 23 February 2024
• Potential trade tariffs: Markets are concerned about potential trade tariffs that could be imposed when Trump takes office in January, which could hurt European exports

Amid these developments, markets have adjusted their expectations for the ECB's future monetary policy, with market participants now expecting a 25bp cut in December and lower odds of a larger cut.

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