EUR/USD is struggling to maintain support near 1.0220 after hitting its lowest level in over two years, with analysts predicting further downside toward parity. This decline is largely attributed to the contrasting monetary policies of the Federal Reserve (Fed) and the European Central Bank (ECB), which have significantly impacted the outlook for both currencies.
Fed’s Cautious Rate Cuts vs ECB’s Easing Cycle
On the US side, the Fed’s guidance suggests a more cautious approach to rate cuts in 2025. The latest projections from the Fed's Summary of Economic Projections show Federal fund rates expected to decline to 3.9% by the end of the year, signaling two rate cuts instead of the previously anticipated four. Market sentiment has adjusted to these forecasts, with expectations growing that policies under President-elect Donald Trump—such as tighter immigration controls, higher import tariffs, and lower taxes—will fuel economic growth and inflation, further supporting the US Dollar.
Conversely, the ECB’s stance remains dovish. ECB officials have signaled that they foresee continued easing in monetary policy. Yannis Stournaras, Governor of the Bank of Greece, mentioned that the ECB might reduce interest rates to around 2% by the autumn of 2025, suggesting multiple rate cuts in the coming months. Investors are pricing in up to four 25-basis-point cuts this year due to concerns over inflation staying below the ECB’s 2% target and sluggish economic growth in the Eurozone.
This divergence in policy outlook between the Fed and ECB is likely to keep the US Dollar strong against the Euro, which faces additional pressure from the potential fallout of a trade war with the US and weak economic activity in the Eurozone.
US Dollar Strength and Economic Data Impact
Despite a slight pullback, the US Dollar Index (DXY), which tracks the Greenback against six major currencies, remains near its highest level in two years, above 109.00. As the Fed adopts a more cautious stance on interest rate cuts, market participants are turning their attention to upcoming US labor market data. On Friday, traders will focus on the ISM Manufacturing PMI for December, which is expected to hold steady at 48.4, indicating continued contraction in the manufacturing sector.
Any weakness in the manufacturing sector could further influence the Fed’s decision-making process regarding interest rates. A weaker PMI reading could add pressure on the USD, but unless the data indicates a severe slowdown, the Greenback is expected to maintain its bullish momentum.
ECB Dovish Bets and Eurozone Inflation Concerns
For the Euro, the outlook remains bearish, with traders pricing in significant dovish actions by the ECB. The ECB’s concerns about persistent low inflation and the potential negative impact of a US-led trade war on Eurozone exports are major drivers of this outlook. Moreover, the weak performance of the Eurozone’s manufacturing sector, highlighted by the December HCOB Manufacturing PMI dropping to 45.1 from the flash estimate of 45.2, adds to the bearish sentiment surrounding the Euro.
Looking ahead, market attention will shift to the preliminary Harmonized Index of Consumer Prices (HICP) data for Germany and the broader Eurozone, which will be released early next week. A lower-than-expected inflation print would likely reinforce the ECB’s dovish stance, increasing the likelihood of further rate cuts and placing additional pressure on the Euro.
Technical Outlook: EUR/USD Eyes Parity
From a technical perspective, the EUR/USD pair faces significant downside risks. After breaking below the two-year low of 1.0330, the pair is poised to test the next key support level around 1.0100. The 20-week Exponential Moving Average (EMA) at 1.0620 is declining, confirming a bearish trend, while the 14-week Relative Strength Index (RSI) has fallen to near 30, indicating strong downside momentum.
However, there could be a slight recovery if the RSI enters oversold territory, but resistance is expected to hold firm at the weekly high of 1.0458. A break below 1.0100 would signal that the pair could continue its descent toward parity, a level that many analysts believe is within reach given the ongoing policy divergence between the Fed and ECB.
The EUR/USD pair remains under pressure, with the Fed’s cautious rate cut outlook and the ECB’s dovish stance weighing heavily on the Euro. As market participants digest upcoming economic data, including the US ISM Manufacturing PMI and Eurozone inflation numbers, the currency pair is likely to continue its downward trajectory toward parity. With the Fed’s policy tightening and the ECB’s ongoing easing cycle, the US Dollar is expected to remain resilient, further exacerbating the challenges for the Euro in the coming months.
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