The Euro/US Dollar (EUR/USD) exchange rate is showing signs of a temporary pause in its recent sharp decline. After hitting a two-year low of 1.0177, the pair has seen two consecutive days of attempting to recover. However, this stability is fragile, with all eyes now on the upcoming release of US inflation data. This crucial data point will likely heavily influence expectations surrounding the future direction of the US Federal Reserve’s (Fed) monetary policy.
Diverging Central Bank Policies Drive Currency Movements
The core issue driving the EUR/USD’s struggles appears to be a significant divergence in expected monetary policy between the US and Europe. Investors in the massive $13 trillion corporate bond market are keenly aware that US Treasury yields are anticipated to outperform their European counterparts. This is primarily due to the European Central Bank (ECB) being expected to implement several interest rate cuts throughout the year, while the Fed is widely expected to maintain higher rates for longer. This stark contrast in policy outlook is a rare occurrence, especially this early in the year, according to Bloomberg data. The only similar divergence was observed in 2023, when markets anticipated rising interest rates rather than the current scenario of impending cuts.
This fundamental difference in central bank approaches is placing substantial downward pressure on the EUR/USD exchange rate.
Interest Rate Outlook for 2025
Looking ahead to 2025, markets anticipate the ECB to cut interest rates by more than three times, totaling over 75 basis points, despite some recent adjustments to these expectations. In contrast, the market currently expects only one interest rate cut from the Fed, driven by the continued strength of the US labor market. The ECB, however, has indicated it intends to proceed with rate cuts regardless of the Fed’s actions. It’s crucial to remember that these market expectations can shift rapidly in response to new economic data. As recently as December 2024, traders were pricing in more than three Fed rate cuts for 2025.
Trading Advice: Proceed with Caution
For our TradersUp readers, the EUR/USD pair appears to be on a path towards parity (a 1:1 exchange rate). Therefore, it’s essential to exercise caution, avoid unnecessary risks, and closely monitor the factors influencing this currency pair.
Technical Analysis: Bearish Trend Persists
Our technical outlook for the EUR/USD remains unchanged. The overall trend is still firmly bearish, and the recent rebound seems temporary. Investors are keenly awaiting important US economic announcements. Key support levels for the euro are currently identified at 1.0220, 1.0170, and 1.0080. These levels could potentially push technical indicators into oversold territory. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators are firmly in the bearish zone. Therefore, we continue to recommend selling the euro-dollar on any upward movements.
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