The EUR/USD pair is holding steady near 1.0740 during Thursday’s Asian session after experiencing a significant 2% drop in the previous session. Despite the recent depreciation, the downside risk for the pair remains, as the US Dollar (USD) could find further support from market optimism surrounding former President Donald Trump’s victory in the US elections.
With Republicans poised to regain control of both chambers of Congress, they could push through an expansive agenda that includes tax and spending cuts, energy deregulation, and tighter border security. Early priorities from Republican lawmakers may include extending Trump’s 2017 tax cuts, funding the US-Mexico border wall, cutting unspent funds, dismantling the Department of Education, and limiting the powers of agencies like the Consumer Financial Protection Bureau.
US Dollar Outlook: Mixed Sentiment Amid Fed Rate Cut Expectations
Despite the political optimism, the US Dollar Index (DXY), which tracks the USD against a basket of six major currencies, has retreated from a four-month high of 105.44, recorded on Wednesday. The DXY is trading around 104.90 amid a correction in US Treasury yields, which surged to their highest levels since July at 4.31% and 4.47%, respectively.
As traders look ahead, there is an overwhelming expectation that the US Federal Reserve (Fed) will implement a 25 basis points rate cut during its November meeting, with the CME FedWatch tool showing a 98.1% probability for this move. The consensus in the market is for a modest reduction this week, signaling a potential softening of monetary policy.
European Concerns: Potential ECB Rate Cuts Amid Trump’s Tariffs
On the European front, concerns about a slowdown in growth due to potential tariffs under Trump’s agenda are increasing. If Europe’s economy falters under these pressures, the European Central Bank (ECB) may be forced into aggressive action, potentially cutting rates close to zero by 2025. Market expectations point to a 25 basis point rate cut in the ECB’s Deposit Facility Rate in December.
The economic calendar for the Eurozone this week is light, with Pan-European Retail Sales data scheduled for Thursday and the EU leaders’ summit concluding on Friday. ECB President Christine Lagarde is also slated to make an appearance on Saturday, which could provide additional guidance on the central bank’s future policy stance.
As traders await key developments, the EUR/USD pair remains sensitive to both US domestic political dynamics and Europe’s economic outlook, with the potential for further volatility in the coming days.
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