The EUR faces pressure from weak eurozone data, dovish ECB rhetoric, and political instability in France, signaling economic and fiscal challenges. The AUD remains supported by resilient domestic consumption, a strong labor market, and cautious RBA policy, with no immediate rate cuts expected. However, while eurozone fundamentals weaken, Australia’s steady domestic conditions offer the AUD relative strength.

EUR: Under pressures

The EUR remains under significant bearish pressure, driven by weak economic data, dovish ECB rhetoric, and heightened external risks. The latest eurozone PMI data paints a grim picture of the region’s economic health, with indicators pointing toward a renewed risk of recession. Market expectations have shifted accordingly, pricing in faster ECB rate cuts, with a 50bps reduction now considered for the December meeting. The rate market has also priced in 150bps of cuts by October 2025, far exceeding expectations for the Federal Reserve, highlighting the policy divergence weighing on the EUR.

ECB officials have consistently struck a dovish tone. François Villeroy de Galhau, often seen as a centrist, emphasized that risks to inflation and growth are "shifting to the downside," supporting the view for further monetary easing. He downplayed recent strong wage growth data as backward-looking, aligning with the ECB's assessment that wage pressures will ease next year. Meanwhile, the ECB’s Financial Stability Report revealed growing concerns over economic growth rather than inflation, further justifying the dovish outlook.

External risks add to the euro’s challenges. The election of Donald Trump and his anticipated trade policies pose a significant threat to the eurozone, especially if aggressive tariffs on EU goods materialize. Such tariffs could exacerbate the region’s economic struggles, undermining ECB efforts to stabilize the economy. Additionally, the euro remains vulnerable to geopolitical risks, including the ongoing Ukraine conflict, which dampens investor sentiment toward Europe.

Political instability in France exacerbates the bearish outlook. Challenges in passing the national budget raise the risk of fiscal deficits exceeding targets, while a potential government collapse could lead to early elections. Such developments heighten uncertainty, pressuring the EUR further. The growing OAT/Bund spread, now nearing 80 basis points, signals rising concerns about eurozone fiscal health and adds to the negative momentum in EUR/USD, increasing the risk of parity.

Although stronger wage growth and a weaker euro could fuel inflationary pressures, providing potential upside risks in the medium term, the ECB’s focus on growth concerns limits these factors' influence. Near-term focus will remain on key eurozone data, including the flash HICP estimate and German Ifo index, where stabilization could offer temporary relief. However, dovish ECB signals, weak economic fundamentals, and heightened external risks keep the EUR under significant bearish pressure.

AUD: Hawkish RBA

The AUD is likely to find support from resilient domestic factors, while external risks could act as significant headwinds. The RBA continues to emphasize a cautious and data-dependent approach, keeping monetary policy restrictive until inflation is sustainably within the 2-3% target range. The latest minutes suggest the RBA is unlikely to cut rates in the near term, with Australia’s four major banks projecting a first rate cut no earlier than February or May 2025. This restrained outlook is supported by steady domestic consumption and labor market conditions, which remain resilient despite global uncertainties.

Looking ahead, the market will closely monitor the Australia Monthly CPI data. Any resurgence in monthly CPI would reinforce the RBA’s recent hawkish stance and provide near-term support for the AUD. However, even if the Monthly CPI comes in lower than expected, it is unlikely to shift the RBA’s position to hold off on a December rate cut, as the Monthly CPI does not fully represent the comprehensive inflation picture in Australia. This nuance underscores the RBA’s reliance on broader data trends rather than isolated monthly fluctuations.

On the external front, potential global risks loom large. The possibility of Donald Trump’s re-election and renewed US-China trade tensions could trigger supply-side shocks, elevating inflation and disrupting global growth. Such tensions would likely impact China, Australia’s largest trading partner, weakening its growth and reducing demand for Australian exports. Additionally, increased US tariffs on Chinese goods could pressure Australian export prices. The AUD’s strong correlation with the CNY further amplifies its sensitivity to these geopolitical developments, exposing it to fluctuations tied to trade disputes.

In summary, while domestic fundamentals and inflation trends remain supportive, external challenges, including trade risks and China’s economic outlook, and geopolitical risk could limit AUD upside. The currency may find strength in the near term, particularly with supportive inflation data, but geopolitical headwinds are likely to temper sustained gains.