Euro backtracks after strong rally

EUR/USD has reversed course today and is in negative territory. In the North American session, the euro is trading at 1.0043, down 0.30%.

US dollar bounces back

The US dollar has rebounded after a 3-day slide against the major currencies. The dollar downswing started on Friday after a lukewarm employment report raised expectations that the Fed will deliver a “modest” 50-basis point, rather than a 75 bp move at the December meeting. This was followed by a short covering move on Monday which sent the dollar sharply lower, as risk appetite jumped ahead of the US midterms and Thursday’s inflation report. The euro made the most of the dollar’s weakness, rising 250 points in an impressive 3-day rally.

The US dollar has rebounded against the majors today, including the euro. With the Federal Reserve remaining aggressive, even a 0.50% should be enough to give the dollar a boost, as rate differentials continue to widen. Inflation is running at a double-digit clip in the eurozone, but it’s doubtful that the ECB will keep pace with the Fed, as the eurozone economy remains weak and higher rates are likely to tip the economy into a recession.

The markets are keeping an eye on the US midterm elections, which are tighter than expected, as the Democrats are fighting to retain control of both the House and the Senate. Investors are focussing on Thursday’s October US inflation report, which will be a key factor in Fed rate policy. Inflation is expected to have eased slightly, with headline inflation dropping to 8.0% (8.2% prior) and core inflation slowing to 6.5% (6.6%).  A drop in the October reading will raise expectations for the Fed to raise rates by 0.50% at the December meeting.

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EUR/USD Technical

• EUR/USD faces resistance at 1.0134 and 1.0293
• There is support at 1.0047 and 0.9888

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