EUR/USD edges higher as Fed speakers talk up Christmas interest-rate cut

EUR/USD recovers on Tuesday, with a single Euro (EUR) buying about 1.0510 US Dollars (USD) as morning breaks along the east coast of America. 

The US Dollar (USD) is trading down against the Euro (EUR) after various members of the US Federal Reserve (Fed) said on Monday, that they thought the labor market and inflation were now in balance and, as such, the Fed should continue to cut interest rates. Lower interest rates are negative for a currency as they reduce foreign capital inflows. 

Fed Governor Christopher Waller came the closest to outright advocating for a cut, after saying he was leaning “toward supporting a cut in December.” 

This helped solidify bets for the Fed making a 25 basis points interest-rate cut at its December policy meeting. The CME FedWatch tool calculates the probability of such a move as 72.5% on Tuesday, up from around 65% before his comments. 

If the Fed goes ahead with a rate cut at its meeting on December 17-18 it would probably give a boost to the stock market in time for the seasonal “Santa Rally” when stocks have a seasonal propensity to rally during Christmas time. 

In Europe, meanwhile, heightened political risk caps the Single Currency and limits gains for EUR/USD. The French government of Prime Minister Michel Barnier faces collapse after opposition parties rejected his Budget plan and signed a motion of no confidence. If ousted it will be the first time a French government has been ousted by such a vote since 1962. 

The Euro also faces pressure from cementing expectations that the European Central Bank (ECB) will also cut interest rates in the Eurozone in December, and this in turn, is likely to limit gains for the pair. 

On Tuesday, European Central Bank (ECB) board member Piero Cipollone said that US tariffs could weaken the Eurozone economy, translating into lower consumption and thus reduced pressure on prices.

"All this put together makes me think that we will have a reduction in growth but also a reduction in inflation," he said.

Lower inflation would probably lead the ECB to cut interest rates more aggressively than currently expected, thereby weakening the Euro. 

His comments follow similar statements from ECB governing council member Martins Kazaks on Monday, who suggested he was in favor of making further cuts to Eurozone interest rates on Monday.

Key data releases for the EUR/USD pair this week are likely to be US labor market metrics, including JOLTS job openings on Tuesday, Initial and Continuing Jobless Claims on Thursday and Nonfarm Payrolls (NFP) for November on Friday. 

If the labor market data reflects a resilient employment situation it will support the Greenback and drive EUR/USD lower. That said, the NFP data is likely to be lower-than-average given the negative impact of recent hurricanes on the US economy.

Recent US data, however, paints a broadly positive picture of growth for the country, with the US November Purchasing Managers Index (PMI) beating estimates and the Atlanta Fed GDPNow Tracker for Q4, pointing to 3.2% growth – its highest level on record.