EUR/USD strengthened to around 1.1260 during Asian trading hours on Thursday (November 5), sitting in the region of a near one-month high. The dollar weakened against the euro after the Democratic Party seized control of the U.S. Congress in the midterm elections. Germany's September factory orders data is due later on Thursday.
The Democratic Party won majorities in both the U.S. Senate and the House of Representatives on Tuesday, wresting control back from the Republicans. The party secured its first significant victories in decades across several Republican strongholds, with tens of millions of voters delivering a sharp rebuke to President Trump.
Dollar Under Pressure: Democratic Sweep Limits Fiscal Spending, Greenback May Weaken Further
A currency strategist at an institution said: "Given that Democrats are now dominant, we expect them to control both the House and the Senate." She added that if this expectation materializes, "the dollar could weaken further from here, because a Democratic sweep would limit government spending during Trump's term." The logic behind this view is that divided government means narrower room for fiscal expansion, and some of the fiscal expectations that previously supported the dollar consequently diminish, raising the dollar's risk premium.
Eurozone Inflation: October Harmonized CPI Rises to 4.0%, First Touch in Three Years
Preliminary data released on Wednesday showed that the eurozone's October harmonized consumer price index jumped to 4.0% year-on-year, the highest level in three years. This reading came in above September's 3.8% and matched market expectations. This is the first time eurozone inflation has reached or exceeded the 4% threshold since 4.3% in September 2023. The European Central Bank kept its key rate at 2.5% last month, after having raised rates by 25 basis points in September. According to media data, the market is currently pricing a nearly 72.0% probability of an ECB rate hike at its final meeting of the year in December, up from 71.8% before the inflation data was released.
Institutional View: Data Mixed but Broadly Resilient, Officials Send Clear Hawkish Signals
Analysts at an institution noted that the latest eurozone data was mixed but broadly resilient: "Eurozone October CPI was confirmed at 4.0% year-on-year (core at 2.5%)," although "the eurozone services and composite PMI final readings were slightly revised down to 51.4 and 51.7 respectively due to downward revisions in French data." On the policy front, the institution emphasized the clearly hawkish tone of ECB officials: "ECB Governing Council member Nagel said on Tuesday that the inflation picture has deteriorated and that tightening policy in December is likely necessary." His colleague "Sleijpen said the Iran shock is more persistent than previously thought, although there are currently no signs of second-round inflation effects," while "Council member Kocher said a December rate hike is possible unless circumstances change."
Hawkish Signals: Nagel Says December Hike 'Likely,' Inflation Close to Adverse Scenario
ECB Governing Council member Nagel delivered a more hawkish message than usual, insisting that the ECB "can and must" prevent the energy shock from turning into broad inflation, highlighting a strong tightening bias that should support the euro through rate expectations. Nagel's confidence that France will resolve its budget problems, combined with his statement that "this is not the task of monetary policy," indicates a clear division of fiscal and monetary policy responsibilities, reinforcing the ECB's rationale for focusing on price stability. For the foreign exchange market, the combination of above-expected inflation and a clear openness to further tightening tilts the risk toward a stronger euro, especially if subsequent data validates the adverse scenario narrative before December.
Conclusion
EUR/USD rose to around 1.1260, a near one-month high, driven by both the dollar and euro sides. On the dollar side, after the Democratic sweep of both chambers, the market expects divided government to limit government spending during Trump's term, and the dollar may weaken further. On the euro side, October harmonized CPI rose to 4.0%, touching that level for the first time in three years, the market prices about a 72% probability of an ECB rate hike in December, and Nagel said a December hike is "likely" and that inflation is close to the adverse scenario, with officials' hawkish signals providing rate-expectation support for the euro. Institutions noted that eurozone data was mixed but broadly resilient, with PMI slipping slightly due to downward revisions in French data. The short-term direction depends on whether subsequent data such as German factory orders can validate the adverse scenario narrative, on officials' remarks ahead of the ECB's December meeting, and on whether the dollar's weakness under the pricing of a political stalemate continues.
(EUR/USD daily chart, source: Yihuitong)
At 12:23 Beijing time, EUR/USD was quoted at 1.1262/63.
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