The EUR/USD declined on Wednesday, falling below 1.06 after weaker than expected Eurozone inflation data strengthened the case for more expansive monetary policy by the European Central Bank (ECB).
The EUR/USD exchange rate fell 0.4% to 1.0580. The pair faces immediate support at 1.05580, the low from November 30, and resistance at 1.0640, the high from November 27.
The dollar rebounded sharply on Wednesday, reversing the previous day’s drop after payrolls processor ADP said US private payrolls rose 217,000 in November, well above forecasts. The dollar index, a weighted average of the US currency against a basket of peers, climbed 0.4% to 100.20.
A stronger dollar knocked the EUR/USD from the 1.10 region in November, as investors grew more confident that a US rate rise was looming. The EUR/USD declined around 4% in all of November.
Expectations for diverging monetary policy between the Fed and ECB also weighed on the euro on Wednesday after government data showed another month of weak inflation. Eurozone consumer prices rose 0.1% annually in November, unchanged from the previous month and below forecasts calling for 0.2%, the European Commission said.
November’s rate meant it was highly unlikely for Eurozone inflation to reach the ECB’s modest forecast of 0.4% in Q4 as a whole. As a result, the ECB is widely expected to expand the size and scope of its stimulus program on Thursday. Analysts are predicting another 20 basis point cut to the deposit rate, which is already in negative territory, as well as a six-month extension to the quantitative easing program that was originally designed to run through September 2016.
So-called core inflation, which strips away volatile goods such as food and energy, also weakened in November, falling to 0.9% year-on-year from 1.1%.
Separately, Eurozone producer prices declined 3.1% annually in November, official data showed.
Low inflation has been a drag on advanced economies for more than a year, as markets grapple with plunging commodity prices. The price of oil has collapsed around 60% since mid-2014.
Crude prices declined again on Wednesday. The West Texas Intermediate (WTI) benchmark for US crude fell 62 cents or 1.5% to $41.23 a barrel on the New York Mercantile Exchange. International benchmark Brent crude also fell 53 cents or 1.2% to $43.91 a barrel on ICE Futures Europe.
A stronger dollar also weighed on precious metals, with February gold prices falling nearly $4 per troy ounce. Silver futures and industrial metals also declined.
Based out of Toronto, Canada, Husni Sam Borji is senior macroeconomics analysts who contributes regularly to TradersDNA, where he examines the global financial markets. Husni Sam has authored dozens of government reports and industry whitepapers, as well as thousands of financial articles. Husni Sam holds a BA from the University of Windsor and a Master’s degree in Economic Public Policy from McMaster University.
His expertise includes macroeconomics, fundamental analysis, industry research and global political economy.