The EUR/USD pair plunged to a fresh two-year low near 1.0170 at the start of the week as the US Dollar gained strength amid rising bond yields and diminished expectations for Federal Reserve interest rate cuts. The pair’s slide reflects broad selling pressure on the Euro due to weak market sentiment and dovish signals from the European Central Bank (ECB).
US Dollar Gains Strength After Upbeat Jobs Data
The US Dollar Index (DXY), which measures the currency against six major peers, surged above 110.00—its highest level in over two years. This rally came after the US Nonfarm Payrolls (NFP) data for December exceeded expectations, signaling a robust labor market. Payroll numbers showed an increase from November, while the unemployment rate declined, further bolstering the case for the Federal Reserve to maintain its higher-for-longer interest rate stance.
US bond yields also spiked, with the 10-year Treasury yield hitting a yearly high of 4.80%. Analysts, including Bank of America, have revised their expectations, now predicting the Fed’s interest rate cutting cycle may have ended, citing resilient economic activity and persistent inflation risks.
Euro Under Pressure as ECB Signals More Easing
The Euro faced additional headwinds from dovish commentary by ECB officials. During the Asian Financial Forum, ECB Chief Economist Philip Lane hinted at further interest rate cuts to prevent economic stagnation in the Eurozone. Lane emphasized the importance of maintaining a balanced approach, avoiding overly aggressive or cautious measures.
Similarly, ECB policymaker Boris Vujčić supported the likelihood of gradual interest rate reductions but dismissed the possibility of accelerating the pace of easing. These dovish signals weighed on the Euro as traders grew wary of the widening policy divergence between the ECB and the Fed.
Key Market Factors Driving EUR/USD
Risk Aversion: Investor sentiment has been subdued amid fears of potential trade tensions under US President-elect Donald Trump’s administration. Trump has hinted at imposing tariffs on EU goods, further reducing appetite for riskier assets like the Euro.
Upcoming US Data: Markets are eyeing the release of the US Producer Price Index (PPI) and Consumer Price Index (CPI) data for December, scheduled for Tuesday and Wednesday, respectively. These reports could further shape expectations for Fed policy.
Technical Signals:
The pair is trading near key support at 1.0100, a level that could determine the next phase of its downward trajectory.
The 20-week Exponential Moving Average (EMA) at 1.0580 continues to decline, reinforcing bearish momentum.
The 14-week Relative Strength Index (RSI) has slipped below 30.00, signaling oversold conditions but also strong downside momentum.
Technical Analysis: Bearish Outlook
EUR/USD remains under significant selling pressure, with a bearish trend dominating the weekly chart. Key technical indicators point to further declines:
Support Levels:
Immediate support lies at the psychological level of 1.0100.
Further downside could see the pair testing levels below parity if bearish momentum persists.
Resistance Levels:
On the upside, the January 6 high of 1.0437 serves as the first major hurdle for Euro bulls.
A break above 1.0437 would bring the 20-week EMA at 1.0580 into focus.
Broadly Bearish Sentiment
EUR/USD faces a challenging path ahead, with the pair firmly entrenched in a bearish trend. Strong US economic data, elevated Treasury yields, and hawkish Fed expectations have buoyed the US Dollar, while dovish tones from the ECB further weigh on the Euro.
Investors will closely monitor upcoming US inflation data and any new developments from ECB officials for further clues on the pair’s direction. However, unless sentiment shifts significantly, the outlook for EUR/USD remains bearish, with further downside likely in the near term.
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