Synopsis:

Danske Bank predicts additional downside for EUR/USD following its decline below 1.11, driven by various economic and geopolitical factors.

Key Points:

• The decline in EUR/USD is linked to escalating tensions in the Middle East, which have increased safe-haven demand, pushing up oil and gold prices.
• The disinflationary process in the euro area is progressing faster than expected, solidifying expectations for an October rate cut from the ECB, with markets pricing in approximately 23bp of cuts.
• Euro area HICP inflation fell to 1.8% y/y in September, down from 2.2% in August, primarily due to energy price declines influenced by base effects.
• Services inflation remains a concern but is trending lower, with a 3m/3m SAAR momentum drop to 4.05% from 4.40%.
• In the US, Fed Chair Powell has tempered expectations of a significant rate cut in November, supported by strong JOLTs data indicating increased job openings but slower hiring and fewer layoffs.
• Weak ISM manufacturing data (47.2) and a significant decline in the prices paid component suggest a complex economic landscape.

Conclusion:

Given the shifting dynamics in inflation and monetary policy between the euro area and the US, along with geopolitical tensions, Danske Bank expects further weakness in EUR/USD in the near term.