Oversold Euro-Dollar Cements A Base Above 1.05

Image © Giuseppe Milo, CC BY 2.0. Source.

The Euro to Dollar exchange rate (EUR/USD) cemented a base above 1.05 following an on-consensus U.S. job report and easing anxieties over France's political outlook.

The Dollar fell in the wake of the release of U.S. job numbers for November that showed a robust 227K increase in employment, which was above October's hurricane-impacted 14K but close to expectations for 200K.

The Dollar's decisive rally through October and November now leaves the greenback requiring ever more impressive data outturns to keep it going.

This on-consensus job report won't provide the surprise factor to trigger a fresh bout of strength in the USD. It certainly won't be enough to crack the 1.05 floor in Euro-Dollar that appears to be firming.

"The US job creation engine came back to life in November after October’s strike- and hurricane-related slowdown, but the rebound likely wasn’t strong enough to derail the Federal Reserve’s easing plans," says Karl Schamotta, a currency strategist at Corpay.

The data means the Federal Reserve is now almost certain to cut interest rates later this month, whereas such an outcome was not assured at the start of the week.

Growing confidence that the Fed would cut again has seen the Dollar ease and helped EUR/USD firm above 1.05 following the 7.30% peak-to-trough decline seen in October and November.

The Fed will be particularly interested in news that the U.S. unemployment rate unexpectedly rose to 4.2% in November from 4.1%, suggesting there is scope to cut rates.

"With valid questions over the quality of the jobs the US is currently creating, we continue to expect the Fed to cut the policy rate 25bp on 18 December," says James Knightley, Chief International Economist at ING Bank. "We continue to think the Fed will indeed cut by 25bp, just to keep policy moving from restrictive territory towards neutral."

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The Dollar can remain under pressure until its next big test, which comes in the form of next week's U.S. inflation report. Here, an above-consensus reading would prompt the market to lower expectations for the number of cuts that are likely in 2025, which would bolster the Dollar.

"This risk to that view is next week’s core CPI print coming in hot. The consensus is 0.3%, but so long as that is closer to 0.25% rather than 0.349% we think they will indeed opt to cut on 18 December," says Knightley.

For its part, the Euro continues to show limited interest in France's political mess. If anything, indications that the country will simply roll over the existing budget into next year look to be enough to contain market anxieties.

"For now, we do not see major euro downside from the political sagas in either Germany or France, and we expect the currency to gain ground," says Dominic Schnider, Strategist at UBS Switzerland AG.

Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole, says investors have become excessively bearish on the Eurozone outlook.

"We also see less scope for contagion from the OAT selloff and doubt that the ECB would meet the very dovish market expectations. We thus think many negatives are already in the price of the oversold and undervalued EUR," he adds.