The EUR/USD currency pair has seen a boost, climbing to a fresh weekly high near 1.0450, as the Euro gained ground against the US Dollar. This movement occurred in thin trading conditions on Monday, as market participants prepare for the New Year. The primary driver behind the Euro's rise was the release of stronger-than-expected inflation data from Spain. The preliminary Harmonized Index of Consumer Prices (HICP) for December showed a 2.8% increase in prices year-on-year, surpassing estimates of 2.6% and the previous figure of 2.4%. Month-on-month, inflation grew by 0.4%, exceeding the anticipated 0.3%. Despite these gains, the Euro remains on track to end 2024 with an approximate 5.5% loss against the US Dollar, largely driven by the European Central Bank's (ECB) dovish guidance and concerns over the potential economic fallout from a trade war with the US.
ECB’s Dovish Stance and Concerns Over Economic Growth
The Euro's overall weakness throughout 2024 can be attributed to the ECB's cautious monetary policy. In response to economic challenges, the ECB lowered its Deposit Facility rate by 100 basis points to 3% this year, and expectations are for it to be reduced further to 2% by mid-2025. The ECB's dovish outlook is compounded by concerns about inflation risks, particularly the possibility of inflation falling below its target of 2%. These worries have been exacerbated by political uncertainties in Germany and the looming threat of trade restrictions under US President-elect Donald Trump, which could impact the Eurozone's export sector.
ECB officials have expressed differing views on how to approach the US trade situation. ECB President Christine Lagarde has cautioned against retaliation, arguing that trade restrictions and tit-for-tat measures would harm the global economy. Conversely, Finnish central bank Governor Olli Rehn has suggested that the EU should be prepared to take countermeasures to strengthen its negotiating position against potential US tariff hikes.
US Dollar Weakness and Upcoming Data
The US Dollar, on the other hand, has faced pressure, particularly in Monday’s illiquid trading session. The US Dollar Index (DXY), which measures the value of the Dollar against a basket of six major currencies, dropped to around 107.80 but remains on track to close the year near its highest level. A key factor supporting the Dollar has been rising US Treasury yields, as investors anticipate economic policies under the incoming Trump administration, including higher tariffs and tax cuts, which are expected to stimulate growth and inflation.
The Federal Reserve has already signaled fewer interest rate cuts for 2025, with projections indicating that Federal Fund rates will reach 3.9% by year-end. Market participants are also waiting for the upcoming ISM Manufacturing Purchasing Managers’ Index (PMI) data for December, due on Friday. The index is expected to edge down slightly to 48.3, indicating continued contraction in the manufacturing sector, which could further impact sentiment toward the Dollar.
Technical Outlook for EUR/USD
From a technical perspective, EUR/USD remains in a bearish trend, consolidating in a tight range above the two-year low of 1.0335. The 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0464 and 1.0588, respectively, continue to point downward, signaling a negative bias for the pair. The Relative Strength Index (RSI) is hovering near 40, and a sustained move below this level could trigger further downside momentum.
In the event of a break below the key support level of 1.0330, the next significant target for EUR/USD would be the round-level support at 1.0200. On the upside, resistance remains at the 20-day EMA near 1.0500, which would act as a critical barrier for the Euro bulls.
Outlook and Key Risks
Looking ahead, the outlook for EUR/USD is heavily influenced by the policies of both the European Central Bank and the Federal Reserve. While the ECB's dovish stance and concerns over Eurozone growth pose risks for the Euro, the US Dollar's strength could face challenges if economic data, such as the ISM Manufacturing PMI, points to weaker-than-expected growth in the US. Additionally, any developments regarding US trade policies under President-elect Trump will be key to shaping market sentiment in the coming months.
As the year wraps up, traders will be closely watching these macroeconomic trends and central bank policies, which will continue to drive the EUR/USD currency pair in 2025.
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