Forex News
- Gold struggles to attract buyers as hawkish Fed expectations continue to dominate market sentiment.
- Markets now fully price in a December Fed rate hike following stronger US inflation and hawkish Fed remarks.
- XAU/USD remains bearish below the 20-day SMA, while the RSI near 41 points to weak buying momentum.
Gold (XAU/USD) slips back below $4,000 on Thursday, giving up most of last week’s gains as bets on more aggressive Federal Reserve (Fed) interest rate hikes lift the US Dollar (USD) to a fresh year-to-date high. At the time of writing, XAU/USD trades around $3,889, down more than 2% on the day.
Selling pressure intensified after US President Donald Trump wrote on Truth Social, “We don’t need a deal with Iran. Those days have long since passed.” Oil prices turned higher after his remarks, adding to inflation concerns.
Data released on Thursday showed that US Initial Jobless Claims rose to 200K from 191K the previous week, above the 195K forecast. The four-week average held steady at 195.25K. The rise in claims took some steam out of the US Dollar’s rally. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades near 102.95, off its high of 103.08.
Fed Governor Christopher Waller put a 50-basis-point (bps) hike in December on traders’ radar before Tuesday’s US inflation report. Waller said a half-point hike could be needed if October core Consumer Price Index (CPI) came in “around 0.3% or higher.” And that’s what happened. Core CPI rose 0.3% on the month, above the 0.2% forecast, while headline CPI rose 0.4%, beating the 0.3% estimate.
Markets fully price in December Fed hike
Analysts at MUFG/BTMU note that "there are currently around 28bps of hikes priced by December, and 43bps of hikes priced by the following meeting in January," which "indicat[es] that even if the Fed hikes by 25bps in December, it is now expected to quickly follow up with another 25bps hike at the start of next year."
ING strategists add that "the combination of hawkish Fed speak and a US CPI beat earlier this week continues to pay dividends for the Dollar," with DXY now "back at Liberation Day (April 2025) levels." They stress that "real front-end rate differentials [are] continuing to fuel strong Dollar momentum" and that "this remains a rates-driven move, with contained excessive USD strength relative to short-term fair value currently built in."
The prospect of higher borrowing costs takes some shine off Gold as investors favour assets that pay interest. Traders now turn to the Producer Price Index (PPI) due on Friday, with several Fed officials also set to speak over the rest of the week.
Technical analysis: Weak RSI keeps downside risks in focus
On the daily chart, XAU/USD remains bearish as it sits below the 20-day Simple Moving Average (SMA) of the Bollinger Bands at $4,042. Momentum is relatively subdued, with the 14-day Relative Strength Index (RSI) hovering around 41, suggesting only modest buying interest despite a mildly positive Moving Average Convergence Divergence (MACD) reading above zero.
On the topside, initial resistance is seen at $4,000, followed by the mid-Bollinger 20-day SMA at $4,042. A sustained break above these levels would open the way toward $4,150 and the Bollinger upper band at roughly $4,199. On the downside, immediate support appears at the lower Bollinger band near $3,885, and any decisive move below that zone is likely to reinforce the prevailing bearish bias and expose deeper retracement levels.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
US President Donald Trump said the US does not need a deal with Iran in one of several Truth Social posts on Thursday. In the same post, Trump said he had asked Vice President JD Vance to focus on what he described as widespread crime and corruption in Democratic-led cities and states.
The remarks came after The Wall Street Journal reported that Vance was weighing face-to-face talks with senior Iranian security official Mohsen Rezaei in an effort to end the war. The discussions were preliminary, and no date had been set.
Trump’s Truth Social post
I have asked Vice President Vance to focus his complete and total attention on the Massive Corruption and Crime taking place in Democrat run Cities and States throughout the U.S. The Blue States, such as Minnesota, California, Illinois, and many more, are all poorly run, corrupt disasters. Billions of Dollars is being stolen each and every month. Our Budget could be quickly BALANCED with the correction of this large scale criminal activity. CORRUPTION is in the Democrat Leadership’s blood! We don’t need a deal with Iran. Those days have long since passed. We’ve got their money, Hundreds of Billions of Dollars, and we’ve got their Strait! Thank you for your attention to this matter. President DJT
West Texas Intermediate (WTI) reversed earlier losses after Trump’s remarks, rising more than 1% on the day to around $86.40 a barrel.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
- Initial Jobless Claims went up to 200K vs. the previous week.
- Continuing Jobless Claims dropped to 1.697M.
According to a report from the US Department of Labor (DOL) released on Thursday, the number of US citizens submitting new applications for unemployment insurance increased to 200K for the week ending November 7. The latest print came in above initial estimates (195K) and was higher than the previous week’s 191K (revised from 189K).
Additionally, the 4-week moving average held steady at 195.25K vs. the previous week’s revised prints.
The report also indicated that Continuing Jobless Claims shrank by 20K to 1.697M for the week ending October 31.
Market reaction
The Greenback clings to daily gains and motivates the US Dollar Index (DXY) to keep its strong recovery well in place, trading just below the 103.00 barrier in the wake of the release.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
Brown Brothers Harriman’s Elias Haddad highlights that USD/JPY has tested the 160.00 resistance area, reviving intervention concerns after Japan’s large summer FX operations. Officials warn recent currency moves have been too fast. While ongoing Dollar strength keeps upside pressure on USD/JPY, the threat of renewed action is seen limiting sustained breaks above 160.00 and skewing risk against further JPY selling.
Key 160.00 level draws official focus
"USD/JPY tested key resistance at 160.00, putting intervention risks back in the spotlight. Indeed, Japan’s top currency official, Atsushi Mimura, warned “the currency moves over the past few days have been too fast…It’s too early to forget what happened this summer.”"
"As a background, Japan spent a record ¥15.4 trillion ($97bn, or roughly 10% of its FX reserves) to prop up JPY on July 30-31 and August 3. The US also stepped in, with intervention estimated at $1bn. The FX reaction was swift."
"USD/JPY plunged from an intra-day high of 163.74 on July 30 to a low of 155.23 on August 3 and has largely failed to sustain a break above 160.00 since."
"Bottom line: USD strength keeps USD/JPY under upward pressure, but the threat of intervention tilts the risk-return against further JPY selling and should limit overshoots above 160.00."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- USD/CAD holds near a one-month high as diverging Fed-BoC rate expectations weigh on the Canadian Dollar.
- USD/CAD remains bullish above the 50-day and 100-day SMAs, with the RSI near 66 signaling strong buying momentum.
- The pair faces immediate resistance at 1.4300, while 1.4200 offers initial support.
USD/CAD is little changed on Thursday, holding near a one-month high. A broadly stronger US Dollar (USD) and diverging interest rate expectations for the Federal Reserve (Fed) and the Bank of Canada (BoC) keep the Canadian Dollar (CAD) on the back foot. At the time of writing, USD/CAD trades around 1.4245, down 0.04% on the day.
USD strength seen pressuring Canadian Dollar as BoC hike odds fade
According to TD Securities, the US Dollar still has scope to advance against selected majors, with analysts noting that “across global major currencies, we see room for the USD to rally selectively against CAD and KRW in the near-term.” They argue that “diverging employment data releases will likely keep USDCAD supported above 1.40,” as Canada’s labour market softens relative to the US. In particular, TD highlights that a “rising unemployment rate amid falling wage growth rate in Canada also reduces the market pricing of a December BoC rate hike relative to the Fed,” reinforcing their view that the Canadian Dollar will remain under pressure against the Dollar in the near term.
Technical Analysis
USD/CAD bulls have the upper hand. The pair has erased all of its October losses and climbed above the 50-day and 100-day Simple Moving Averages (SMAs), with the 200-day SMA well below the current price.
Momentum conditions back the topside tone, with the Relative Strength Index (RSI) hovering around 66, edging toward overbought territory, while the Moving Average Convergence Divergence (MACD) remains positive and above its recent lows, hinting at sustained buying interest.
On the downside, initial support sits near 1.4200, followed by former resistance at 1.4120, which now acts as support. Below these, the cluster of trend-supporting averages between the 50-day SMA at 1.4074 and the 100-day SMA at 1.4044 should act as a deeper cushion ahead of the longer-term 200-day SMA at 1.3909.
On the upside, the October peak near 1.4300 offers immediate resistance. A break above it could open the door to further gains toward the 1.4400 psychological level.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
The US Dollar (USD) has extended its upward trajectory across global foreign exchange markets, propelling the US Dollar Index (DXY) to a fresh year-to-date high of 103.08 and returning the currency to its April 2025 levels. This renewed rally is firmly anchored in real front-end rate differentials following stronger-than-expected US inflation data and hawkish Federal Reserve (Fed) rhetoric, which has prompted traders to price in a faster pace of monetary tightening. Alongside rate-driven momentum, reduced concerns over political interference at the Fed and resilient safe-haven inflows are reinforcing the Greenback’s valuation. Institutional strategists at MUFG, ING, and Rabobank assess that while near-term inflation prints and Fed communications point toward further upside, medium-term US fiscal deficit pressures remain a key variable for the US Dollar's broader outlook.
MUFG sees back-to-back December and January Fed hikes lifting the US Dollar
Lee Hardman at MUFG highlights that expectations for an accelerated Federal Reserve tightening cycle — spurred by recent strong US inflation readings — have driven the US Dollar Index DXY to a fresh year-to-date peak of 103.08. While Hardman does not anticipate a 50 bps hike in December, futures pricing points toward back-to-back 25 bps increases in December and January, making upcoming commentary from New York Fed President John Williams pivotal for confirming the rate path.
"The US dollar has continued to strengthen overnight resulting in the dollar index hitting a fresh year-to-date high of 103.08. The US dollar’s renewed upward momentum has been encouraged by expectations that the Fed is likely to speed up the pace of rate hikes in response to the recent run of stronger US inflation data... There are currently around 28bps of hikes priced by December, and 43bps of hikes priced by the following meeting in January indicating that even if the Fed hikes by 25bps in December it is now expected to quickly follow up with another 25bps hike at the start of next year... While we don’t expect a larger 50bps hike to be delivered in December, it is more likely now that the Fed could hike rates back-to-back in December and January."
ING expects front-end rate differentials and PPI data to fuel another US Dollar leg higher
Francesco Pesole and the FX strategy team at ING emphasize that the US Dollar's return to April 2025 levels is a fundamentally sound, rates-driven advance supported by real front-end yield differentials rather than excessive speculative stretching. With Fed Governor Chris Waller placing a 50 bps December rate hike on the table and market pricing still sitting at 28 bps, ING sees clear scope for hawkish repricing, identifying upcoming Producer Price Index (PPI) figures as a potential trigger for further USD gains.
"The combination of hawkish Fedspeak and a US CPI beat earlier this week continues to pay dividends for the dollar. DXY is now back at Liberation Day (April 2025) levels, with real front-end rate differentials continuing to fuel strong dollar momentum. Importantly, this remains a rates-driven move, with contained excessive USD strength relative to short-term fair value currently built in... We continue to see upside risks for the dollar in the coming days. The Fed's Chris Waller has put a 50bp December move on the radar, and that should keep markets biased towards hawkish interpretations of incoming data. December pricing remains at 28bp, leaving scope for further adjustment... Today’s home sales data are unlikely to matter, but tomorrow’s PPI will. That may be the catalyst for another USD leg higher."
Rabobank argues Fed credibility and safe-haven flows refute US Dollar debasement fears
The FX Strategy team at Rabobank contends that easing concerns over political interference at the Federal Reserve and resilient safe-haven inflows have restored Greenback credibility, allowing the currency to capitalize on robust US economic growth and upcoming Eurozone pressures. Although Rabobank warns that a US budget deficit above 6% of GDP and signs of slipping "exorbitant privilege" in the Treasury market could weigh on the USD over the medium term, the team concludes that previous US Dollar debasement fears were overstated.
"Diminished fears about political interference on the Fed is a supportive factor for the USD. In addition, at the start of the Gulf war, strong demand for the USD undermined last year’s claims that the USD’s had lost at least part of its safe haven value. In our view the USD’s safe haven appeal is linked to its embedded position in global payments systems, which could take decades to shake... Reduced concerns over the credibility of the greenback should allow it more opportunity to benefit from the US’s robust economic growth performance... There is still a risk that concerns related to the US’s unwieldly budget deficit could weigh on the USD over the medium-term. The US budget deficit at over 6% of GDP is wider than that of France... Either way, last year’s dollar debasement fears appear exaggerated."
Key Takeaway
The US Dollar's climb to a fresh year-to-date high of 103.08 reflects a powerful alignment of front-end interest rate repricing, institutional credibility, and structural safe-haven demand. While MUFG and ING highlight that sticky inflation and hawkish Fed commentary — including 28 bps to 43 bps of tightening priced across December and January alongside talk of a potential 50 bp move — leave near-term risks skewed toward further US Dollar gains on upcoming PPI data, Rabobank underscores that even with medium-term fiscal deficit risks above 6% of GDP, the Greenback's entrenched role in global financial markets keeps it firmly positioned to outperform major peers.
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- NZD/USD flatlines around 0.5550 as the reversal from the 0.5650 area loses steam.
- The US Dollar takes a break as investors discount a quarter-point Fed rate hike in October.
- Growing Fed-RBNZ monetary policy divergence is likely to keep Kiwi rallies limited.
The New Zealand Dollar (NZD) is trading practically flat against the US Dollar (USD) on Thursday, holding losses after the last two days’ reversal. The NZD/USD pair is looking for direction at the lower range of the last four weeks’ trading band, with the year-to-date low of 0.5527 at a short distance after another rejection around 0.5650.
The Greenback has outperformed its peers this week, boosted by hot US Consumer Price Index (CPI) figures on Tuesday, which heightened hopes that the Federal Reserve (Fed) will hike interest rates at least by a quarter point at its December meeting.
Fed officials have endorsed that view and are likely to reiterate the hawkish stance later on Thursday. A string of policymakers from the US central bank are expected to speak in public later in the day, some of whom have already expressed concern about elevated price pressures and support for further monetary tightening in December.
BBH: "The USD might have run too far, too fast"
Brown Brothers Harriman’s Elias Haddad, however, cautions that “the USD rally may have run too far, too fast.” He notes that “USD has overshot the level implied by rate differentials, limiting the scope for further gains in the near-term.”
Haddad also points out that market expectations for a “jumbo 50bps fed funds rate hike in December” are likely to be tempered, as they “will likely be constrained by stagnant US real wages and the resulting headwind to consumption spending,” suggesting the possibility of some USD repositioning in the coming days.
The New Zealand Dollar received some boost at the week's opening after last weekend's election provided a narrow victory to the centre-right ruling coalition, easing concerns about a period of political uncertainty. This, however, failed to alter the negative trend triggered by the Reserve Bank of New Zealand's decision to keep interest rates on hold against expectations in late October.
In that sense, lower Oil prices provide some relief for New Zealand's economy, as the country is a net Crude importer, although they also give reasons for RBNZ's doves to stand pat on rates and increase the monetary policy divergence with the Fed.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.
Brown Brothers Harriman’s (BBH) Elias Haddad notes the Dollar Index has retreated from its post-October CPI highs, with the USD rally seen as stretched versus rate differentials. He highlights that stagnant US real wages may cap expectations for a 50bps Fed hike in December.
USD rally seen stretched near term
"The dollar index (DXY) has pulled back from its highest level since early April 2025, when President Donald Trump unveiled his Liberation Day tariffs. The USD rally was fueled by a sharp repricing in fed funds rate expectations following the hot US October CPI print and amplified by hawkish Fed rhetoric."
"Nevertheless, the USD rally may have run too far, too fast. USD has overshot the level implied by rate differentials, limiting the scope for further gains in the near-term. Moreover, pricing of a jumbo 50bps fed funds rate hike in December will likely be constrained by stagnant US real wages and the resulting headwind to consumption spending."
"Today’s second-tier US data (weekly jobless claims and October existing home sales) are unlikely to move the needle, leaving Fed speakers in focus."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
The European Central Bank (ECB) is expected to raise its deposit rate by 25 basis points to 2.75% in December, according to a Reuters poll published on Thursday. All 71 economists surveyed expect a hike next month. Of those, 46 expect the deposit rate to peak at 2.75%, while 25 see another hike, most likely in the first quarter of 2027.
Economists raised their inflation forecasts from a month ago and now expect Eurozone inflation to remain around twice the ECB’s 2% target through at least the second quarter of 2027.
They see inflation averaging 3.1% in 2026 and 2.8% in 2027, up from 3.0% and 2.6% in the October poll. Core inflation is also expected to pick up, averaging 2.6% this quarter and 2.8% in the first quarter of 2027.
The growth outlook also improved. Economists now expect the Eurozone economy to expand by 1.1% in 2026 and 1.3% in 2027, up from 1.0% and 1.2%, respectively, in the October poll.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Elias Haddad at Brown Brothers Harriman (BBH) reports that the Pound (GBP) showed limited reaction to solid UK Q3 GDP, with 0.7% q/q growth driven by consumption and investment. Swaps still price a high probability of back-to-back Bank of England (BOE) hikes, pushing rates above neutral and raising future growth risks. For now, resilient UK activity is seen as supportive for GBP, particularly versus EUR.
Strong UK growth supports Pound
"GBP largely ignored the UK’s good Q3 GDP print. Real GDP increased 0.7% q/q vs. 0.5% in Q2, matching consensus and the BOE’s forecast. Household consumption and fixed investment were the main growth drivers."
"September real GDP also surprised to the upside, rising 0.2% m/m (consensus: 0%) after stagnating in August, underpinned by gains in services, production and construction."
"The swaps curve still implies about 70% odds of a back-to-back 25bps hike to 4.25% on December 17, and a total of 85bps of tightening over the next twelve months. That would push the policy rate well above the BOE’s estimated 2-4% neutral range, raising the risk of a sharper growth slowdown ahead. For now, resilient UK economic activity reinforces the case for additional BOE hikes which is GBP positive, especially against EUR."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
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