EUR/USD surged to around 1.0520 during Thursday’s European trading session, ahead of the European Central Bank‘s (ECB) widely expected interest rate decision. The ECB is set to announce a 25 basis point reduction to its Deposit Facility rate at 13:15 GMT, bringing it down to 3%. This rate cut would mark the third consecutive reduction by the ECB and the fourth of the year, reflecting ongoing concerns about Eurozone economic performance and easing inflationary pressures.
Investors are closely watching for further guidance from ECB President Christine Lagarde, who will address the press at 13:45 GMT. Lagarde’s remarks are expected to provide insights into the central bank’s future monetary policy stance.
Annalisa Piazza, an economist at MFS Investment Management, emphasized that the ECB’s rate cut and dovish outlook are warranted due to weakening economic growth in the Eurozone. “Fundamentals fully justify the December cut and more dovish forward guidance, given the deterioration in the growth picture. Underlying inflationary pressures have eased and risks of further headwinds to growth have increased after the US election results,” Piazza said.
Meanwhile, German Chancellor Olaf Scholz has triggered a political crisis by calling for a no-confidence vote in the Bundestag, scheduled for December 16. This is a necessary step toward holding a general election on February 23, 2025, following the collapse of his coalition government. The collapse came after Scholz dismissed Finance Minister Christian Lindner, dissolving the three-party coalition.
US Dollar Weakens, Boosting EUR/USD
In a related market move, the US Dollar weakened against a basket of major currencies, with the US Dollar Index (DXY) dipping to around 106.40. This decline was fueled by the release of US inflation data for November, which met expectations but reaffirmed bets on a dovish stance from the Federal Reserve (Fed). The Consumer Price Index (CPI) showed a slight uptick to 2.7%, up from 2.6% in the previous report, while the core CPI, excluding food and energy prices, remained steady at 3.3%.
As a result, market expectations for a potential Fed rate cut next week have surged. According to the CME FedWatch Tool, the probability of a 25 basis point reduction in the Federal Reserve’s interest rate to 4.25%-4.50% has risen to nearly 99%, up from 88% just a day earlier.
Looking ahead, investors will turn their attention to key US economic data, including the Producer Price Index (PPI) and Initial Jobless Claims for the week ending December 6, scheduled for release later Thursday.
Technical Outlook: EUR/USD Holds Above Key Support Level
From a technical perspective, EUR/USD remains volatile, hovering just above the psychological level of 1.0500. The pair faces significant resistance at the 20-day Exponential Moving Average (EMA) near 1.0560, while the 14-day Relative Strength Index (RSI) sits near 40, suggesting a bearish bias. A drop below this level could signal a further decline in EUR/USD.
On the downside, the key support level is located at the November 22 low of 1.0330. Conversely, a break above the 50-day EMA near 1.0680 could indicate stronger bullish momentum for the Euro.
Related Topics:
