EUR/USD traded in a narrow range around 1.0400 during Friday’s European session, with market activity subdued due to the Christmas holiday. The pair faced difficulty finding direction as the US Dollar (USD) edged higher, bolstered by firm expectations that the Federal Reserve (Fed) will continue a gradual policy-easing path amid a slight rebound in inflation over the past three months.
The US Dollar Index (DXY), which tracks the USD against six major currencies, held above the key 108.00 support level, maintaining its recent strength. The USD’s positive performance in recent months has been driven by expectations of robust growth under US President-elect Donald Trump and speculation about a slower pace in the Fed’s interest rate cuts.
The Fed’s most recent dot plot indicated that policymakers expect the federal funds rate to reach 3.9% by the end of 2025, suggesting only two rate cuts next year, down from the previously anticipated four. However, analysts at BCA Research forecast that the Fed could cut rates by more than 50 basis points (bps) next year, as they expect price pressures to fall below the central bank‘s 2% target and the jobless rate to rise beyond the Fed’s forecast of 4.3%. They further noted that fewer rate cuts would require significant improvement in the labor market, which they view as unlikely.
On the economic front, US Initial Jobless Claims data for the week ending December 20 showed a surprise drop, with first-time claims falling to 219K, better than the expected 224K.
Euro Outlook Remains Fragile as ECB Keeps Easing Cycle
Meanwhile, the Euro (EUR) remains under pressure as the European Central Bank (ECB) is expected to continue its rate-cutting cycle through at least the first half of 2025. The ECB has already reduced its Deposit Facility rate by 100 bps this year and is likely to implement another 100-bps cut in the coming months, despite inflation in the Eurozone remaining above the ECB’s 2% target.
ECB President Christine Lagarde expressed confidence in the disinflationary trend, stating that the bank was nearing the point where it could declare inflation sustainably brought back to the 2% target. However, she emphasized the need to remain vigilant regarding inflation in the services sector.
Most ECB policymakers have supported market expectations for consistent rate reductions until the benchmark deposit rate reaches 2%, which they consider a neutral rate, in order to avoid risks of inflation undershooting the target.
Technical Outlook: EUR/USD Nears Two-Year Low
EUR/USD has been consolidating above its two-year low of 1.0335, maintaining a bearish outlook as the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0464 and 1.0588, respectively, continue to trend lower. The 14-day Relative Strength Index (RSI) is hovering near 40, signaling that a sustained move below this level could trigger further downside momentum.
If EUR/USD breaks below the two-year low of 1.0330, the next support target could be the psychological level of 1.0200. Conversely, the 20-day EMA near 1.0500 will act as a key resistance level for any bullish reversal.
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