Euro fluctuates amid cooling inflation and fading ECB rate hike prospects

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Euro fluctuates amid cooling inflation and fading ECB rate hike prospects
Credit: © Reuters.

The euro (EUR) experienced a volatile trading session yesterday, initially strengthening due to a weakening US dollar (USD), but later relinquishing gains as the USD rebounded and European Central Bank (ECB) rate hike expectations faded due to subdued inflation figures. The pound (GBP) largely traded without direction amidst a lack of UK economic data and investor caution ahead of the Bank of England's interest rate decision. Despite disappointing Chinese data, the Australian dollar (AUD) remained directionless, while an uptick in unemployment led to a decline in the New Zealand dollar (NZD).

The Canadian dollar (CAD) softened as oil prices slightly dipped. Today's manufacturing PMI is expected to further highlight the contraction in Canada's sector. The focus now shifts to today's high-impact jobs and manufacturing releases, as well as the upcoming Federal Reserve decision.

The GBP/EUR exchange rates remained steady on Tuesday, trading at around €1.1468 (EUR1 = USD1.0544). ECB Policymaker Francois Villeroy de Galhau confirmed that the cooling inflation across multiple euro zone territories justified their recent halt in rate hikes, reflecting the ECB's decision-making process.

The pound saw variable trade as investors shifted towards safer assets following reports of rockets fired by Yemen towards Israel, causing GBP to fall against these assets. However, sterling managed to gain against riskier currencies like AUD, but these gains were likely limited by UK's economic pessimism and tempered Bank of England interest rate hike expectations.

The final manufacturing index for October could impact Sterling if it confirms previous contractions. Easing cost pressures indicated in the report could negatively affect Bank of England's interest rate bets. German unemployment data, due on Thursday, is expected to show an increase from 5.7% to 5.8%, which could exert downward pressure on the common currency by negatively influencing the EU labor market.

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