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The Euro to Dollar exchange rate (EURUSD) returned some of the previous day's gains as markets pared back the previous day's outsized moves and after the Eurozone printed disappointing industrial production numbers.

Industrial production in the Eurozone fell 1.1% month-on-month in September, said Eurostat, which exceeded the -1.0% expected and marked a deterioration on August's 0.6% growth. Industrial production was -6.9% year-on-year in September, down on -5.1% previously and the -6.3% expected.

The data disappointment rows back against a recent market narrative that 'peak pessimism' had been reached with regards to the Eurozone economy and the Euro.

This narrative had, in part, underpinned Euro-Dollar's recent rally to above 1.08.

The Euro underperformed against all of its G10 peers through the course of the midweek session, suggesting something of an idiosyncratic tinge to proceedings.

But, the decline in the Euro-Dollar is also, in part, a reaction to the immense 1.68% gain recorded the day prior and suggests an element of profit-taking by market participants.

"The dollar tumbled across the board yesterday after cooler than expected US inflation data added more credence to investors' belief that the Fed’s tightening crusade is over, despite Chair Powell and his colleagues pushing back against such expectations recently," says Charalampos Pissouros, Senior Investment Analyst at XM.com.

U.S. headline CPI inflation dropped to 3.2% year-on-year in October from 3.7% in September, while the core rate ticked down to 4.0%y/y from 4.1%, with the forecasts being just a decimal higher.

"Alongside the dollar, Treasury yields also slipped, with the 10-year rate sliding around 20bps, while according to the Fed funds futures, the probability for another Fed hike has dropped to zero. Meanwhile, investors are now penciling in nearly 100bps worth of rate cuts for next year, with an 80% probability for the first one to be delivered in May," says Pissouros.

Strategist Joseph Capurso at Commonwealth Bank says the Dollar "overreacted to the small miss in the CPI."

Commonwealth Bank's strategists now expect the 'risk‑on' reaction to the CPI of a weaker USD, lower bond yields and higher equity markets to be unwound.

If this is already underway, the fall in Euro-Dollar midweek starts to make some sense, particularly if the market was looking for a trigger in the form of softer industrial production numbers.

"The positive reaction from a deceleration in U.S. inflation will give way to worries about the FOMC over‑tightening policy in our view... We also expect the US labour market to weaken appreciably because of past FOMC policy tightening. History shows a US recession is a recipe for a higher USD," says Capurso.