EUR/USD is trading in a narrow range just above 1.0400 on Monday, reflecting illiquid market conditions during the European session. The Euro (EUR) is set to end the year with a nearly 5.5% decline against the US Dollar (USD), with the last three months of 2024 proving especially challenging. This downturn follows the European Central Bank’s (ECB) dovish stance on interest rates and concerns over the Eurozone’s economic prospects, especially in light of US President-elect Donald Trump’s tariff policies, which are expected to disrupt the region’s export sector.
The ECB has already cut its Deposit Facility rate by 100 basis points (bps) to 3% this year, with expectations to further reduce it to 2% by June 2025. This suggests a series of 25 bps rate cuts at each of the ECB’s meetings in the first half of next year. Many ECB officials are also worried about the risk of inflation falling below the central bank’s 2% target, particularly amid political instability in Germany and the looming threat of a US-EU trade conflict.
ECB President Christine Lagarde recently cautioned against retaliatory trade measures, calling such approaches “bad for the global economy.” However, Finnish central bank Governor Olli Rehn advocated for negotiations, emphasizing that the EU should be prepared to take countermeasures if the US imposes higher tariffs on Europe.
On the economic front, market participants are awaiting Spain’s Harmonized Index of Consumer Prices (HICP) data for December, set to be released at 08:00 GMT.
EUR/USD Moves in Line with US Dollar Trends
The EUR/USD pair follows the US Dollar’s trajectory, which remains relatively stable near a four-day support level amid light trading activity. The US Dollar Index (DXY), which tracks the Greenback against six major currencies, hovers around 108.00, poised to end the year near its highest level. A key factor supporting the USD has been the rise in US Treasury yields, as investors anticipate that the incoming Trump administration’s policies—focused on higher tariffs and tax cuts—will drive inflation and boost economic growth. This outlook has prompted the Federal Reserve (Fed) to adopt a more hawkish stance.
The Fed’s recent dot plot indicates fewer interest rate cuts for 2025, with the Federal Funds rate projected to reach 3.9% by the end of that year. Goldman Sachs expects the next rate cut in March, followed by two additional cuts in June and September.
Investors will be closely watching the US ISM Manufacturing Purchasing Managers’ Index (PMI) for December, due for release on Friday. The PMI is expected to decline slightly to 48.3 from 48.4, signaling a continued contraction in the manufacturing sector.
Technical Analysis: EUR/USD Faces Bearish Pressure
EUR/USD has remained in a tight range since Monday, staying above its two-year low of 1.0335. The outlook for the pair remains bearish as both the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0464 and 1.0588, respectively, are on a downward trajectory. The 14-day Relative Strength Index (RSI) is also hovering around 40.00, indicating that a sustained move below this level could signal further downside momentum.
If the pair breaks below the 1.0330 low, the next support level is around the psychological 1.0200 mark. Conversely, the 20-day EMA near 1.0500 will act as a key resistance for any upward movement, limiting potential rallies in the near term.
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