- EUR/USD Surges Above 1.0400 as US PCE Inflation Slows in November
- US Dollar Outlook Stays Strong Amid Fed’s Hawkish Policy Adjustment
- ECB’s Patsalides Rejects Larger Rate Cuts, Advocates for Gradual Policy Easing
EUR/USD Rebounds Above 1.0400 as US PCE Inflation Slows in November
EUR/USD surged sharply above 1.0400 during Friday’s North American session, recovering from a fresh three-week low of 1.0340 recorded earlier in Asian trading. The pair’s recovery is driven by slower-than-expected growth in the US Personal Consumption Expenditures (PCE) Price Index for November, the Federal Reserve’s preferred inflation gauge.
Annual core PCE inflation rose by 2.8%, below the anticipated 2.9%, while monthly core inflation increased by just 0.1%, falling short of the 0.2% estimate and the prior month’s 0.3%.
The subdued inflation data weighed on the US Dollar, pushing the US Dollar Index (DXY) below 108.00 after it reached a fresh two-year high above 108.50 earlier in the day.
Despite the softer inflation, market expectations remain firm that the Federal Reserve will maintain interest rates unchanged in January. Earlier this week, the Fed reduced its key interest rate by 25 basis points to a range of 4.25%-4.50% while signaling fewer rate cuts for 2025. Fed Chair Jerome Powell emphasized the central bank’s cautious stance, citing the economy’s resilience as a reason for a measured approach.
Additionally, stronger-than-expected third-quarter GDP growth further solidifies the Fed’s cautious outlook. The US Bureau of Economic Analysis revised Q3 GDP growth upward to 3.1%, compared to an initial estimate of 2.8%, reinforcing expectations of robust economic momentum into 2024.
Market Movers Daily Digest: EUR/USD Climbs as the Euro Recovers
EUR/USD sees a brief uptick near its yearly low as the Euro (EUR) strengthens following the approval of tax reforms by German lawmakers. These reforms will reduce annual tax revenue by 14 billion euros, leaving households with more disposable income. This increase in household funds is expected to boost demand and stimulate economic growth. Additionally, higher spending could reduce the risk of Eurozone inflation falling short of the European Central Bank’s (ECB) 2% target, particularly since Germany is the largest economy in the region.
In addition, ECB policymaker and Governor of the Central Bank of Cyprus, Christodoulos Patsalides, has dampened expectations for larger rate cuts to stimulate growth, which has further supported the Euro’s appeal in the short term. “I personally prefer small adjustments in a gradual process rather than larger interest rate cuts,” Patsalides stated, citing increased uncertainty surrounding inflation in both directions, according to Reuters.
Patsalides added that he would consider larger interest rate cuts only if inflation expectations indicate that price pressures will remain “well below the target for a very long time.”
Currently, traders are pricing in four additional interest rate cuts from the ECB by June 2025. This follows the ECB’s reduction of its Deposit Facility rate four times this year, with a total decrease of 100 basis points (bps) to 3%.
Technical Analysis: EUR/USD Remains Below All Short-to-Long-Term EMAs
EUR/USD holds the key support level of 1.0340 during Friday’s European session. However, the outlook for the pair remains strongly bearish, as all short- to long-term Exponential Moving Averages (EMAs) are showing a downward trend.
The 14-day Relative Strength Index (RSI) has dropped into the bearish range of 20.00-40.00, signaling the onset of fresh downside momentum.
Looking ahead, the pair could slide toward the round-number support at 1.0200 after breaking below the two-year low of 1.0330. On the upside, the 20-day EMA around 1.0500 will act as a key resistance for Euro bulls.