EUR/USD consolidates ahead of holiday-shortened week as Fed supports shallow rate-cut cycle

• EUR/USD trades in a tight range as volumes thin out due to fewer trading days this week amid holidays on account of Christmas Eve and Boxing Day.

• The Fed sees fewer interest rate cuts in 2025 as the disinflation process stalls and amid increasing uncertainty over Trump’s policies.

• ECB Lagarde said she believes that a victory over inflation is near.

EUR/USD trades quietly at the start of the week around 1.0440 in Monday’s European session. The major currency pair trades in a limited range amid thin trading volume in a holiday-shortened week due to Christmas Eve and Boxing Day on Wednesday and Thursday, respectively.

The US Dollar (USD) steadies on Monday after a sharp sell-off on Friday that was triggered by slower-than-expected growth in the United States (US) Personal Consumption Expenditure Price Index (PCE). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles below 108.00.

Core PCE inflation, which is the Federal Reserve’s (Fed) preferred inflation gauge, rose steadily by 2.8% but slower than estimates of 2.9%. Month-on-month, headline, and core PCE inflation grew marginally by 0.1%, which raised some uncertainty over whether the Fed will follow a shallow rate-cut path in 2025.

Fed policymakers see the central bank delivering fewer interest rate cuts next year amid a slowdown in the disinflation process and the uncertainty over the impact on the economy of incoming immigration, trade, and tax policies by President-elect Donald Trump.

Cleveland Fed President Beth Hammack, the only official who voted for leaving interest rates unchanged in the policy meeting last Wednesday, said on Friday that she prefers to hold interest rates steady "until the Fed gets further evidence that inflation is resuming its path to its 2% objective,” Reuters reported.

On Friday, Chicago Fed President Austan Goolsbee told in an interview with CNBC that the uncertainty over Trump’s policies after taking office compelled him to project fewer interest rate cuts for 2025 while he had previously anticipated a 100-basis points (bps) interest rate reduction.

Monday’s economic calendar is light. On Tuesday,  investors will focus on the US Durable Goods Orders data for November. Economists expect orders to have declined by 0.4% after a 0.3% increase in October.

Daily digest market movers: EUR/USD holds onto recovery move 

EUR/USD holds recovery from the four-week low of 1.0350 to near 1.0440 on Monday. The major currency pair bounced back due to the Euro’s (EUR) outperformance in the past few trading sessions even as market participants remain confident that the European Central Bank (ECB) will continue pushing interest rates lower.

The ECB has cut its Deposit Facility rate by 100 bps this year and is expected to deliver another 100-bps interest rate reduction next year amid deepening Eurozone economic risks and inflation remaining under control.

Almost all ECB policymakers have agreed to market expectations for a consistent reduction in interest rates until it reaches 2%, which they see as a neutral rate to avoid risks of inflation undershooting the bank’s target of 2%.

ECB President Christine Lagarde said she remains confident about further progress in disinflation in an interview with the Financial Times (FT) published Monday. “We're getting very close to that stage when we can declare that we have sustainably brought inflation to our medium-term 2%”, Lagarde said. 

Technical Analysis: EUR/USD stays above 1.0350

EUR/USD holds the key support of 1.0350. However, the outlook of the major currency pair remains strongly bearish as all short-to-long-term Exponential Moving Averages (EMAs) are declining. 

The 14-day Relative Strength Index (RSI) bounces back to near 40.00. A fresh downside momentum could trigger if the oscillator fails to sustain above that level.

Looking down, the asset could decline to near the round-level support of 1.0200 after breaking below the two-year low of 1.0330. Conversely, the 20-day EMA near 1.0500 will be the key barrier for the Euro bulls.