EUR/USD hovers near 1.0850, downside seems possible due to shift in policies outlook

• EUR/USD may face challenges due to market perception changes regarding central banks' policy outlooks.
• The US Dollar gained ground due to the fading likelihood of an aggressive rate cut by the Fed in November.
• The ECB may accelerate its pace of policy easing to bolster growth in the Eurozone.

EUR/USD remains steady after gains in the previous session, hovering around 1.0860 during Monday's Asian trading hours. A potential downside looms as speculation about a 50-basis-point rate cut by the Federal Reserve (Fed) in November has been dispelled by recent data showing the US economy's resilience.

According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut in November has risen to 99.3%, up from 89.5% a week earlier. US Retail Sales rose by 0.4% month-over-month in September, surpassing the 0.1% gain recorded in August and market expectations of a 0.3% increase. Additionally, US Initial Jobless Claims fell by 19,000 during the week ending October 11, the largest decline in three months. The total number of claims dropped to 241,000, significantly below the anticipated 260,000.

Rabobank's research suggests that the market is interpreting recent comments from European Central Bank (ECB) officials as an indication that they are increasingly comfortable with the Eurozone's inflation outlook. As a result, the ECB seems to be shifting its focus toward supporting regional growth. This has fueled speculation about a possible faster pace of ECB easing, including the potential for a larger 50-basis-point interest rate cut. Such a move could weigh on the Euro and exert downward pressure on the EUR/USD pair.

The Euro faced downward pressure following the European Central Bank's (ECB) decision to cut its interest rates by 25 basis points last week. The move is in response to a significant drop in inflation, which had surged to a high of 10.6% in October 2022 but has since fallen to 1.7% in September, now below the ECB's 2% target.