EUR/USD has recovered some of its losses from the previous session, trading near 1.0280 during Asian hours on Monday. However, the pair’s upside may be limited as the US Dollar (USD) could gain strength due to market caution ahead of President-elect Donald Trump’s inauguration later in the day. The US markets are closed on Monday for the Martin Luther King Jr. Day holiday.
Trump’s Policies and Rising US Treasury Yields Boost USD
Concerns over Trump’s policy proposals—such as imposing tariffs, extending tax cuts, and deporting illegal immigrants—have driven up US Treasury yields, providing support for the US Dollar ahead of his inauguration. Analysts suggest that the Federal Reserve’s future interest rate decisions will largely depend on the extent to which the Trump administration follows through on these policies.
Investors will closely monitor Trump’s planned executive orders, expected to be issued shortly after his swearing-in. Meanwhile, the Federal Reserve is expected to keep interest rates steady at its January meeting, with many economists forecasting a resumption of rate hikes in March.
Euro Faces Challenges with Dovish ECB Outlook
The Euro (EUR) is under pressure due to persistent dovish expectations for the European Central Bank (ECB). Markets are pricing in a 25 basis point (bps) rate cut at each of the next four ECB meetings, reflecting concerns about the Eurozone’s economic outlook and expectations that inflationary pressures will remain subdued.
Minutes from the ECB’s December meeting, released last week, revealed that policymakers were focused on the pace of policy easing this year, with discussions around a potential 50 bps rate cut to mitigate downside risks to growth. These risks are compounded by both global and domestic political uncertainties, further weighing on the Euro.
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