EUR/USD faces renewed selling pressure as U.S. inflation boosts Fed rate hike expectations

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Dollar strength puts euro under pressure

Treasury yields and dollar strength weigh on the euro

The main factor behind the pressure on the euro was the U.S. consumer inflation data released on November 10. October CPI rose by 0.4% month-over-month versus expectations of 0.3%, while the core reading increased by 0.3% against a forecast of 0.2%. The data reinforced concerns about persistent inflationary pressure and prompted investors to reassess expectations for the Fed's December meeting.

Additional pressure came from comments by Fed Governor Christopher Waller, who suggested that a 50-basis-point rate hike could be possible if core inflation accelerates further. The yield on two-year U.S. Treasuries jumped by approximately 19 basis points following the CPI release, approaching 4.74%, which significantly increased the appeal of dollar-denominated assets.

The bond market's reaction became one of the most significant drivers of exchange rate movements. The yield on ten-year U.S. Treasuries approached 4.99% the previous day, while the U.S. Dollar Index (DXY) strengthened to approximately 102.3. European bond yields did not experience a comparable increase: on November 11, the yield on ten-year German government bonds stands at around 3.30%.

As a result, the widening gap between U.S. and European interest rates continues to weigh on EUR/USD. Declining risk appetite following the inflation report has also played a role, as major U.S. stock indices ended the previous session mostly lower, strengthening demand for the dollar. Meanwhile, today's Veterans Day holiday in the U.S. government bond market is limiting trading activity and could make the currency pair more sensitive to individual large transactions.

Softer German inflation limits ECB policy options

Final data released today by Destatis confirmed that annual inflation in Germany slowed from 3.3% in September to 2.8% in October, while the Harmonised Index of Consumer Prices declined by 0.1% month-over-month. Core inflation eased to 2.1%, despite persistently strong growth in energy costs. For the ECB, these figures indicate a gradual easing of domestic price pressures, although geopolitical risks and conditions in the energy market do not yet allow further monetary tightening to be ruled out.

The ECB's deposit rate stands at 2.50%, but the European regulator faces a more challenging combination of moderate economic growth and inflation risks. Against this backdrop, the prospect of more decisive action by the Fed limits the euro's potential for appreciation, despite the continued caution of European monetary authorities.

Key support at 1.1100 comes into focus

In the coming days, investors' attention will shift to U.S. producer inflation data (PPI), scheduled for release on November 13, as well as new comments from Fed and ECB officials. Ahead of these events, bears are clearly targeting support near 1.1100, where another upward rebound remains possible given the pair's current consolidation phase. A break below this support, as stated in EUR/USD holds above 1.1200 as traders await U.S. inflation data, would intensify downward pressure and lead to a decline toward 1.1050.

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