The EUR/USD pair experienced a volatile session, initially attempting an upward rebound that stalled at 1.0435 before settling around 1.0335. This price action comes ahead of the release of the Federal Reserve’s meeting minutes, which are expected to shed light on the central bank’s stance on future interest rate cuts. The minutes are particularly important after the Fed’s recent shift in market outlook regarding potential rate adjustments in the new year.
Eurozone Inflation Surprises to the Upside
The euro received a boost from stronger-than-expected inflation data in the Eurozone. Annual inflation accelerated to 2.4% in December, the highest level since July, up from 2.2% in November and in line with market expectations. This marks the third consecutive monthly increase, bolstering the view that the European Central Bank (ECB) will likely maintain a cautious approach toward cutting interest rates. Inflation data from Germany and Spain supported this sentiment, while figures from France and Italy were weaker.
Meanwhile, market participants remain attentive to former US President Donald Trump’s trade policy intentions. His administration’s stance on tariffs is adding to the uncertainty.
US Equities Stabilize After Previous Sell-off
US stock futures stabilized after a significant sell-off in the previous session, triggered by a rise in Treasury yields. The Dow Jones Industrial Average closed down 0.42%, the S&P 500 fell 1.11%, and the Nasdaq Composite dropped 1.89%. These declines followed stronger-than-expected ISM services data, which indicated an acceleration in both activity and prices, fueling concerns about persistent inflation and reducing expectations for near-term Fed interest rate cuts.
The US 10-year Treasury yield rose approximately 6 basis points to 4.68%, reflecting revised inflation expectations and prices. Nvidia shares led the market decline, falling 6.2% despite previous gains driven by the CEO’s speech at CES. Large-cap tech stocks, AI-focused companies, and cryptocurrency-related stocks also experienced notable losses.
US Dollar Strengthens on Hawkish Fed Expectations and Data
The US dollar has strengthened in response to better-than-expected US economic data. US bond yields and the dollar rose following data confirming ongoing inflationary pressures, further dampening expectations for immediate Fed rate cuts. The Institute for Supply Management’s services PMI survey revealed that prices paid by businesses reached their highest level since February 2023. Market sentiment now leans towards the Federal Reserve holding off on rate cuts until at least July, reinforcing the “higher for longer” interest rate narrative that has supported the dollar’s rise since October 2024.
Adding to the bullish dollar case, US JOLTS job vacancies reached a six-month high of 8.098 million in November, surpassing expectations. Overall, the US dollar is expected to remain supported amid market unease stemming from potential US trade policy under former President Trump.
EUR/USD Technical Outlook: Bearish Sentiment Persists
The current market conditions support a bearish outlook for the EUR/USD pair. Selling the pair on any upward rally appears to be the prevailing trading strategy. Factors weakening the euro are considered to be strong and potentially lasting. A return of bearish momentum could drive the EUR/USD toward support levels at 1.0300, 1.0245, and 1.0180, potentially approaching parity. These moves would likely push technical indicators like the Relative Strength Index (RSI) and MACD into oversold territory. Conversely, on a daily chart timeframe, a break of the 1.06 level would be needed to challenge the current downtrend.
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