Euro tumbles to a one-year low as US releases inflation figures

The euro continued to weaken against the US dollar, reaching its lowest level in one year after the United States released the October Consumer Price Index (CPI), which revealed an increase in inflation from the previous month. The EUR/USD pair dropped to 1.0546 at 4:52 am CET on Thursday, the lowest level seen since 1 November 2023. Firming US inflation, along with Trump's recent election victory, has weighed heavily on the euro, causing a 5.7% decline against the dollar since the end of September.

On Wednesday, the US Republicans narrowly secured a majority in the House, giving Trump's party full control of Congress, thereby increasing the likelihood of his policies being enacted. This has added to concerns about inflation risks, pushing up the US government bond yields and adding further strength to the US dollar.

US inflation remains elevated

In October, US headline inflation rose by 2.6% year-over-year, up from 2.4% in the previous month, marking the first increase since March. Meanwhile, core inflation, which excludes volatile food and energy prices, rose by 0.3% month-over-month and by 3.6% year-over-year, marking the fastest rate of increase since April.

This data suggests that inflation pressure in the United States remains persistent, signalling that the Federal Reserve's fight against inflation may not be over. Despite this, markets still expect the Fed to implement another rate cut in December, though the cut may stay modest at 25 basis points.

In September, the Fed delivered a large 50 basis-point rate cut due to concerns over a cooling labour market and slowing inflation. The rate cut initially weakened the dollar, allowing the euro to rise to a 14-month high. However, with the US job market remaining resilient, inflation staying firm, and a renewed Trump-led "Trade" push driving the dollar, the markets have reversed direction.

Rising US bond yields lift dollar’s appeal

Rising inflation expectations have contributed to a further increase in US government bond yields, especially in longer-term Treasury notes. The 10-year Treasury yield has climbed to 4.47%, its highest closing level since 1 July.

While short-term bond yields (under two years) are more closely tied to immediate interest rate outlooks, long-term yields reflect market expectations for broader economic conditions, inflation, and central bank policy. This rise in long-term yields suggests that bond traders expect a strong US economy with persistent inflation and higher interest rates, all of which favour a stronger dollar.

Michael McCarthy, market strategist and COO at Moomoo Australia predicts the US dollar will continue to strengthen amid rising bond yields. "This could drive a longer lift in the USD, as both local and global investors move into those more attractive sovereign yields," he explained.

Wall Street's Trump-fuelled rally lost some steam on Wednesday, though McCarthy notes this may not impact the dollar. "In other words, the post-election enthusiasm for all things USD-denominated could continue and even accelerate, even if optimism fades and shares drop with it," he added.

Euro likely to extend weakness amid economic and political uncertainty

The euro is expected to remain under pressure against other major currencies due to a bleak economic outlook and ongoing political uncertainties in Europe.

A potential trade war between the US and its key trading partners, including China and the EU, may add to the need for a weaker euro to support European exports.

In other words, there are few fundamental factors supporting a stronger euro, making a turnaround unlikely in the near future.