The EUR/USD pair retreated slightly during Asian trading on Monday, hovering near 1.0300, after registering gains in the previous session. Investors are closely watching Eurozone economic releases, including the HCOB Composite Purchasing Managers’ Index (PMI) and Germany’s preliminary Consumer Price Index (CPI), for further direction.
Monetary Policy Divergence Pressures the Euro
The EUR/USD continues to face downward pressure as contrasting monetary policy trajectories between the European Central Bank (ECB) and the Federal Reserve (Fed) fuel expectations of further declines, possibly toward parity.
In the Eurozone, the ECB appears committed to ongoing monetary easing. Markets have already priced in a 113 basis point reduction in interest rates for 2025, signaling at least four 25-basis-point cuts. This reflects mounting concerns over the Eurozone’s inability to meet the ECB’s 2% inflation target.
ECB Governing Council member and Bank of Greece Governor Yannis Stournaras recently stated that the central bank’s base rates should fall to around 2% by autumn 2025. This suggests that the ECB will likely reduce its Deposit Facility Rate at each of the next four monetary policy meetings, reinforcing a dovish outlook for the bloc.
Fed’s Hawkish Stance Bolsters the Dollar
Conversely, the Fed is set to pause its easing cycle at the upcoming January meeting after delivering three consecutive rate cuts. The latest Fed dot plot suggests the Federal Funds Rate will reach 3.9% by year-end, indicating a more restrained pace of monetary easing compared to the ECB.
Fed officials continue to advocate for a cautious approach to rate reductions. Richmond Fed President Thomas Barkin emphasized on Friday that interest rates should remain restrictive until inflation shows definitive signs of stabilizing at the 2% target. Echoing this sentiment, Fed Governor Adriana Kugler and San Francisco Fed President Mary Daly highlighted the delicate balancing act required to achieve price stability while maintaining economic growth.
Technical Outlook: EUR/USD Approaches Parity
The EUR/USD pair remains under pressure, with a clear risk of testing parity if the current trend persists. Immediate support is seen near 1.0280, followed by the critical psychological level of 1.0200. A decisive break below this region could pave the way for a move toward parity.
On the upside, resistance is aligned near 1.0350, followed by the 1.0400 level. Bulls would need a sustained break above these thresholds to negate the bearish outlook and push for a potential recovery.
Economic Data to Guide Sentiment
Traders are eyeing the Eurozone HCOB Composite PMI and Germany’s CPI data for clues on the ECB’s next steps. In the US, the docket includes the ISM Services PMI, JOLTS Job Openings, and Nonfarm Payrolls (NFP) report later in the week. These releases will provide further clarity on the Fed’s policy path and are likely to drive EUR/USD fluctuations.
With monetary policy divergence and economic uncertainties in play, the EUR/USD pair remains at risk of further downside in the near term.
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