Euro strengthened against the dollar ahead of important EU statistics
The euro strengthened against the US dollar on Thursday, October 15, rising to 1.1241 dollars. The recovery of the European currency occurred after a recent drop to 17-month lows amid a weakening dollar and declining yields on US government bonds.
According to Reuters, the dollar previously received support from strong US inflation data, but some investors later revised their expectations regarding further actions by the Federal Reserve. Reuters notes that additional pressure on the US currency came from concerns about the sustainability of investments in the artificial intelligence sector.
Eurozone inflation – the main market guide
On Friday, October 16, FOREX participants are awaiting the release of final eurozone inflation data for September. According to the preliminary Eurostat estimate, annual inflation accelerated to 3.8% after 3.2% in August. The most notable contribution came from energy: year-on-year energy price growth increased to 18.8% from 14.3% a month earlier.
If the final data confirm an acceleration in inflation, this could strengthen expectations that the European Central Bank will maintain a tight monetary policy for longer or consider additional rate hikes. Such a scenario could support the euro, as higher yields on European assets increase their attractiveness to investors.
However, rising inflation will not necessarily lead to a strengthening of the European currency. If the rise in energy prices is accompanied by a deterioration in the eurozone's economic prospects, market participants may fear a slowdown in production and a decline in consumer demand. In that case, the positive effect of expectations of higher rates on the euro could be limited.
If the final figures turn out to be below preliminary estimates or show signs of easing price pressure, the euro could come under pressure again: investors would have grounds to expect a softer ECB policy.
What's next?
In the short term, EUR/USD dynamics will depend on a combination of European inflation statistics, expectations regarding Fed and ECB rates, and the situation in the energy market. Additional risks for the euro remain problems with France's public finances and high energy costs.
Thus, the rise to 1.1241 dollars was an attempt by the euro to recover after a significant decline, but by itself does not yet confirm a sustained trend reversal. If eurozone inflation proves high and the dollar continues to weaken, the euro could develop a recovery. If the statistics disappoint the market or the US currency regains support, EUR/USD risks returning to a decline.