EUR/USD slides as FOMC minutes signal slowdown in US disinflation trend
- EUR/USD drops below 1.0300 after the FOMC minutes dropped hints of a slowdown in the US inflation progress towards the Fed’s target of 2%.
- The USD Index is on track to revisit the two-year high of 109.53 ahead of the US NFP data due on Friday.
- The ECB is expected to reach the neutral rate by summer.
EUR/USD moves lower below 1.0300 but stays inside Wednesday’s trading range in Thursday’s European session. The major currency pair faces pressure as the US Dollar (USD) moves higher, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, aiming to revisit the two-year high of 109.53. The US Dollar rises as Federal Open Market Committee (FOMC) minutes for the December policy meeting signaled that policymakers are cautious about further policy-easing since the disinflation trend progress has stalled.
“Participants expected inflation to keep moving toward 2%, but effects of potential trade and immigration policy changes suggested that the process could take longer than previously anticipated,” FOMC minutes showed.
On Tuesday, the Atlanta Federal Reserve (Fed) Bank President Raphael Bostic also warned that price pressures will likely face bumps in its path towards the central bank’s target of 2%. Bostic said he believes that the policy approach should be more “cautious” because “We don't want to overreact to any one data point in an environment where things may bounce around considerably.”
Going forward, the shared currency pair will be guided by President-elect Donald Trump’s plan to declare a national economic emergency, aiming to provide legal reasoning for the possible increase in import tariffs on the nation’s allies and adversaries.
On the economic front, investors will focus on the United States (US) Nonfarm Payrolls (NFP) data release for December, which will be published on Friday. The official employment data will influence market expectations about when the Fed will deliver its first interest rate cut of the year.
Daily digest market movers: EUR/USD weakens amid US Dollar’s strength
- EUR/USD stays under pressure, mainly due to USD strength. However, the Euro (EUR) exhibits a mixed performance against other peers as an expected growth in the Eurozone preliminary Harmonized Index of Consumer Prices (HICP) data for December has pushed back expectations that the European Central Bank (ECB) will cut its Deposit Facility by larger-than-usual pace of 50 basis points (bps) in the upcoming policy meeting.
- Market participants were anticipating that the ECB could fasten its policy-easing pace to avoid risks of inflation, undershooting the central bank’s target of 2% amid weakness in the overall business activity. However, the ECB will continue easing its monetary policy at a usual pace of 25 bps amid a weak economic outlook.
- ECB officials are confident that interest rates will return to the neutral rate by summer, which is approximately 2%. On Wednesday, ECB policymaker and Governor of the Bank of France Francois Villeroy said that price pressures were expected to tick higher in December but that interest rates will continue heading towards the neutral rate “without a slowdown in the pace by summer” if the upcoming data confirm that the “pullback in price pressures won’t continue”.
- The latest Economic Confidence (EC) survey by Capital Economics suggests that the economic performance of the trade bloc remained stagnant in the last quarter of 2024. The survey’s Economic Sentiment Indicator (ESI) fell to 93.7 in December from 95.6 in November.
- Meanwhile, the Eurozone Retail Sales data for November has come in weaker than expected. The Retail Sales data (MoM), a key measure of consumer spending, rose by 0.1%, slower than estimates of 0.4%.
Technical Analysis: EUR/USD eyes more downside to near 1.0100
EUR/USD trades near the key support plotted from the September 2022 high of 1.0200 on a weekly timeframe. The outlook of the major currency pair is broadly bearish as the 20-week Exponential Moving Average (EMA) at 1.0627 is declining.
The 14-week Relative Strength Index (RSI) slides to near 30.00, indicating a strong downside momentum. However, a slight recovery cannot be ruled out as the momentum oscillator has turned oversold.
Looking down, the pair could find support near the round level of 1.0100. Conversely, the weekly high of 1.0458 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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