The EUR/USD pair is trading sideways around the 1.0300 level, mirroring a period of consolidation in the US Dollar as market participants reassess the Federal Reserve’s (Fed) likely monetary policy for the year. This reassessment comes after mixed US inflation data for December fueled expectations of at least one interest rate cut in 2024.
The US Consumer Price Index (CPI) report showed a complex picture: while headline inflation met expectations with a rise, core inflation increased at a slower pace than predicted. This mixed data has led traders to re-evaluate the Fed’s stance, with the CME FedWatch tool now indicating a possibility of multiple rate cuts this year, echoing projections from December’s Summary of Economic Projections (SEP). This contrasts with pre-CPI expectations of just one rate cut.
Adding to the uncertainty, Fed officials remain cautious about inflation risks and the potential impact of policy changes under the incoming Trump administration. New York Fed President John Williams acknowledged that disinflation is underway, but highlighted economic uncertainty stemming from potential fiscal, trade, immigration, and regulatory shifts.
Traders are now looking towards the release of US Initial Jobless Claims and Retail Sales data later today for further clues about the US economic outlook.
Euro’s Outlook Remains Bearish Amidst ECB Rate Cut Expectations
The Euro’s performance remains mixed against its peers, contributing to the EUR/USD’s sideways movement. However, the overall outlook for the Euro is bearish, driven by expectations that the European Central Bank (ECB) will continue to ease monetary policy.
A recent Reuters poll reveals widespread consensus among economists that the ECB will cut its Deposit Facility rate by 25 basis points in its January meeting, with a majority also anticipating three further rate cuts by mid-year. This sentiment is echoed by ECB policymakers like François Villeroy de Galhau, who sees a reduction of the deposit rate to 2% by mid-summer as logical and consistent with the ECB’s success in combating inflation.
The Eurozone economy faces headwinds, particularly concerns over potential US import tariffs under the Trump administration, which could significantly impact the region’s export sector.
Technical Perspective: EUR/USD Holds Near 1.0300 After Rebound
The EUR/USD is holding steady around the 1.0300 mark after recovering from a low of 1.0175 earlier in the week. This rebound is partly due to a divergence between price action and momentum, with the 14-day Relative Strength Index (RSI) forming a higher low despite the pair making lower lows.
Despite this rebound, the overall technical picture remains bearish, with all short-to-long-term Exponential Moving Averages (EMAs) sloping downwards. Key levels to watch are the Monday low of 1.0175 as a crucial support and the January 6 high of 1.0437 as a resistance level.
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