The EUR/USD currency pair remains under pressure, sliding below the psychological resistance level of 1.0500 on Tuesday as the US Dollar (USD) strengthens broadly. Expectations of a hawkish outlook from the Federal Reserve (Fed) following a modest interest rate cut add to the Greenback’s momentum. Meanwhile, dovish signals from the European Central Bank (ECB) and political turmoil in Germany contribute to the Euro’s bearish sentiment.
Fed’s Hawkish Signals Boost the US Dollar
The US Dollar Index (DXY) climbed above 107.00, reflecting the Greenback’s resilience against major peers. Markets anticipate the Fed will reduce borrowing rates by 25 basis points (bps) to a range of 4.25%-4.50% on Wednesday. However, the Fed is expected to deliver a hawkish stance for 2025, which could further support the USD.
According to the CME FedWatch Tool, traders have priced in this rate cut but do not foresee further adjustments in the January meeting. Analysts at Macquarie note that the Fed’s tone may turn from dovish to slightly hawkish. Contributing factors include slower disinflation, lower-than-expected unemployment, and strong financial market activity.
Investors are closely watching the release of US Retail Sales data for November, scheduled at 13:30 GMT. Economists forecast a 0.5% increase, up from October’s 0.4% growth, signaling continued consumer spending resilience.
ECB’s Dovish Tone Weighs on the Euro
The Euro remains fragile as the ECB signals a continuation of its gradual policy-easing cycle. After delivering a 100-bps rate cut this year, the ECB is expected to reduce rates further throughout 2024. President Christine Lagarde affirmed the central bank’s stance, stating that additional cuts will occur if disinflation trends remain on track. Lagarde highlighted a notable decline in services inflation momentum as a key justification for the policy easing.
ECB Executive Board member Isabel Schnabel, a known hawk, also endorsed gradual rate cuts. However, Schnabel cautioned that the ECB must remain vigilant against potential shocks that could destabilize inflation expectations. Similarly, Olli Rehn, Governor of the Bank of Finland, reiterated that monetary policy is on a clear path, with the speed and scale of cuts to be determined by data at each meeting.
Political Turmoil in Germany Adds Pressure
On the political front, the German parliament’s no-confidence vote against Chancellor Olaf Scholz’s government has set the stage for general elections on February 23. Analysts predict a victory for conservative challenger Friedrich Merz, adding uncertainty to the Eurozone’s economic outlook.
Economic data from Germany further dampened the Euro’s prospects. The December IFO Business Climate index fell to 84.7, while Expectations dropped to 84.4. However, the IFO Current Assessment unexpectedly improved to 85.1, signaling mixed sentiment within Europe’s largest economy.
Technical Analysis: EUR/USD Remains Bearish
Technically, EUR/USD trades near the 1.0500 level, where it has hovered for the past four sessions. The pair faces resistance at the 20-day Exponential Moving Average (EMA) around 1.0540, reinforcing the near-term bearish outlook.
The 14-day Relative Strength Index (RSI) remains around 40.00. A drop below this level could accelerate downside momentum, potentially testing the two-year low of 1.0330 as key support. Conversely, a move above the 20-day EMA would be required to shift sentiment back in favor of the Euro bulls.
EUR/USD Faces Downward Risks
The EUR/USD pair remains under pressure amid contrasting monetary policy outlooks between the Fed and the ECB. While the Fed’s anticipated hawkish stance strengthens the US Dollar, the ECB’s dovish signals, combined with political uncertainty in Germany and weak economic data, weigh heavily on the Euro. With technical indicators pointing to a bearish trend, further downside risks remain in play for EUR/USD in the near term.
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