The EURUSD currency pair is pulling back from its highest levels in more than six weeks, trading at 1.1655 early on Thursday. Despite this retreat, the euro maintains most of the gains achieved during an impressive eight-day rally.
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The US dollar has begun to recover from its recent lows, as the markets experience a calm session. Investors are now turning their attention to forthcoming economic data, notably the Eurozone Retail Sales and US Initial Jobless Claims figures, which are set to be released later today.
Eurusd: Euro’s Rally Driven by Strong Economic Data
The euro surged on Wednesday after the Eurozone HCOB Services Purchasing Managers’ Index (PMI) indicated that activity in the sector grew at its fastest pace in over two years. This positive sentiment was bolstered by similarly encouraging manufacturing data from France and Germany, the Eurozone’s largest economies, both of which exceeded expectations.
US Economic Data Disappoints
Conversely, US economic reports have not provided the same level of optimism. The ADP Employment Change report revealed an unexpected decline in net jobs, raising concerns about the labour market’s health. This data has strengthened expectations that the Federal Reserve may cut interest rates by 25 basis points in their next meeting.
Market Expectations Shift Towards Dovish Fed
With Jerome Powell’s term as Fed chairman ending in May 2026, speculation is growing regarding a more dovish successor. Economic advisor Kevin Hassett is currently seen as a frontrunner, leading investors to contemplate a potential easing cycle in the coming year. Such expectations are exerting downward pressure on the US dollar.
Structural Factors Supporting the Euro
The EURUSD pair could gain further traction as markets begin to price in a December rate cut by the Federal Reserve. Structural factors, alongside developments in energy markets, are also contributing to the euro’s strength. European natural gas prices have recently fallen to their lowest levels since early 2024, enhancing the euro’s competitiveness against the dollar.
However, analysts warn that this supportive environment for the euro might be jeopardised by colder weather, which could tighten gas supply and reverse recent gains. Kirstine Kundby-Nielsen, an FX analyst at Danske Bank, noted, “We now expect the Federal Reserve to cut interest rates in December. Structural drivers could take the forefront again and start pushing EUR/USD higher.”
Natural Gas Market Dynamics
Kundby-Nielsen highlighted the unexpected support for EURUSD stemming from the natural gas market. The drop in European natural gas prices has narrowed the spread with US prices to the tightest level since 2021. This shift is favourable for European manufacturers, who stand to regain competitiveness, while US energy exporters could face reduced revenues.
Despite this positive outlook, the analyst cautions that European natural gas storage levels are low for this time of year. A sudden drop in temperatures could lead to a significant drawdown in inventories, resulting in tighter market conditions and a potential rebound in gas prices. Such a scenario could impact the euro’s performance against the dollar.
As investors await the release of key economic indicators, the EURUSD currency pair’s movements will be closely watched. The interplay between US economic signals, Federal Reserve policy expectations, and developments in energy markets will continue to shape the landscape for the euro and the dollar.
