Eurozone recovery to boost Euro

The Euro may be poised to rally as market participants entertain the news that the worst of the Eurozone’s economic problems may be coming to an end while the optimism on the ability of the U.S. economy to outperform may be overdone according to one analyst.

"We are observing some tentative return of appetite for long euro positions in the market, despite lingering evidence of U.S. activity strength," says Francesco Pesole, FX Strategist at ING Bank.

The recent figures out of Germany, Europe’s largest economy where the ZEW survey index smashed expectations with a figure of -1.1 against analysts’ expectations for a number of -9.3 and also much higher than September’s number of -11.4.

The "figures might have fuelled a narrative that we have already touched peak pessimism in the eurozone, similar to what we are observing with Chinese sentiment. By contrast, markets might start to think optimism on the U.S. growth story is also close to the peak and are anticipating a rotation back into EUR/USD," added Pesole.

A monetary speech by US Federal Reserve president Jerome Powell left the door open for another rate hike next month which may delay any recovery for the Euro in the short term. Mr Powell noted that the US jobs market was proving quite resilient and should this persist, another rate hike may be needed.

"We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy." Mr Powell said.

Since the Fed began raising interest rates in March of 2022 the unemployment rate has varied little from the current 3.8%, below the level most Fed officials feel is noninflationary, and overall economic growth has generally remained above the 1.8% annual growth rate Fed officials see as the economy's underlying potential.

Looking further ahead today, the main drivers of the EUR/USD currency pair will be the release of the producer price index from Germany where investors will be looking for further evidence of economic recovery in the business sector following on from the Zew economic sediment numbers.

From the US there is no major news so the focus will be on any major developments in the ongoing war between Hamas and Israel.