The euro strengthened against the dollar to around 1.1260 in Asian trading on Thursday (November 5), near a one-month high. The dollar weakened against the euro as Democrats gained control of the US Congress in the midterm elections. German factory orders data for September will be released later on Thursday. Democrats won a majority in both the Senate and the House of Representatives on Tuesday, regaining control from Republicans. This marked the party's first major victory in decades in several Republican strongholds, and tens of millions of voters sharply rejected President Trump.

Dollar Under Pressure: Democratic sweep of spending restrictions could weaken the dollar further.

"Given the current Democratic majority, we expect them to control both the House and the Senate," said an institutional currency strategist. She added that if this expectation materializes, "the dollar could weaken further from here, as a Democratic sweep would limit government spending during Trump's term." The logic behind this assessment is that a divided government means less room for fiscal expansion, weakening some of the fiscal expectations that previously supported the dollar, thus increasing the dollar's risk premium.

Eurozone inflation: The harmonized CPI rose to 4.0% in October, the first time it has hit this level in three years.

Preliminary figures released Wednesday showed that the eurozone's harmonized index of consumer prices (HICP) jumped to 4.0% year-on-year in October, the highest level in three years. This figure was higher than September's 3.8% and met market expectations. This marks the first time eurozone inflation has reached or exceeded the 4% threshold since September 2023, when it reached 4.3%. The European Central Bank (ECB) kept its key interest rate at 2.5% last month, following a 25 basis point hike in September. According to media data, the market is currently pricing in a near 72.0% probability of a rate hike at the ECB's final meeting of the year in December, higher than the 71.8% before the inflation data release.

Institutional View: Data is mixed but shows overall resilience; hawkish signals from officials are clear.

An analyst pointed out that the latest Eurozone data was mixed but showed overall resilience: "The Eurozone's October CPI was confirmed at 4.0% year-on-year (core 2.5%)," although "the final readings of the Eurozone services and composite PMIs were slightly revised down to 51.4 and 51.7 respectively due to downward revisions of French data." On the policy front, the analyst emphasized the hawkish tone of ECB officials: "ECB member Nagel said on Tuesday that the inflation picture has deteriorated and a tightening of policy is likely in December." His colleague, "Sleijpen, said the Iranian shock is more persistent than previously thought—although there are currently no signs of a second round of inflationary effects," while "Member Kocher said a December rate hike is possible unless circumstances change."

Hawkish signals: Nagel says a December rate hike is "very likely," inflation is nearing an unfavorable scenario.

European Central Bank (ECB) Governing Council member Nagel delivered a more hawkish message than usual, insisting that the ECB "can and must" prevent the energy shock from turning into widespread inflation, highlighting a strong tightening bias and suggesting that interest rate expectations should provide support for the euro. Nagel's confidence in France's budget resolution, coupled with the statement that "this is not the task of monetary policy," demonstrates a clear division of fiscal and monetary policy responsibilities, reinforcing the ECB's focus on price stability. For the currency market, the combination of higher-than-expected inflation and a clear openness to further tightening shifts the risk appetite towards a stronger euro, especially if subsequent data confirms the unfavorable scenario narrative before December.

in conclusion

The euro rose to a near one-month high of around 1.1260 against the dollar, driven by a dual force from both the dollar and the euro. On the dollar side, the market anticipates a split government after the Democrats swept both houses of Congress, limiting government spending during Trump's term, potentially leading to further dollar weakness. On the euro side, the October harmonized CPI rose to 4.0%, the first time in three years, with the market pricing in a 72% probability of a December rate hike by the European Central Bank. Nagel stated that a December rate hike is "very likely," and inflation is nearing an unfavorable scenario; hawkish signals from officials provided support for the euro's interest rate expectations. Analysts pointed out that Eurozone data was mixed but generally resilient, with the PMI slightly declining due to downward revisions to French data. Short-term trends depend on whether subsequent data, such as German factory orders, can validate the unfavorable scenario narrative, the statements from ECB officials before the December meeting, and whether the dollar's weakness priced in by the political deadlock continues. (Euro/USD daily chart, source: FX678) At 12:23 Beijing time, the euro was trading at 1.1262/63 against the US dollar.