EUR/USD trades sideways as trades reassess Fed’s monetary policy outlook
- EUR/USD wobbles around 1.0300 as the US Dollar consolidates while traders re-evaluate the Fed’s likely interest rate outlook for the entire year.
- Traders see at least one interest rate cut this year after mixed US inflation data for December.
- ECB’s Villeroy sees the deposit facility rate sliding to 2% by the mid-year.
EUR/USD consolidates around 1.0300 in Thursday’s European session. The major currency pair trades sideways, following the US Dollar (USD) footprints, while the US Dollar Index (DXY) wobbles around 109.15. The USD Index strives to recover Wednesday’s losses that were driven by mixed United States (US) Consumer Price Index (CPI) data for December.
The US CPI report showed that price pressures were broadly mixed. On a yearly basis, headline inflation accelerated expectedly, while the core reading rose at a slower-than-projected pace. Signs of mixed inflationary pressures forced traders to reassess market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
According to the CME FedWatch tool, traders anticipate more than one interest rate cut this year, similar to what officials projected in December’s Summary of Economic Projections (SEP). Before Wednesday’s inflation data, traders expected the Fed to cut interest rates only once this year.
However, Fed officials are still worried about the inflation outlook amid uncertainty over incoming policies under President-elect Donald Trump’s administration. New York Fed Bank President John Williams said in a speech at the CBIA Economic Summit on Wednesday that the disinflation process is “in train”; however, the economic outlook remains highly uncertain, especially around “potential fiscal, trade, immigration, and regulatory policies.”
In Thursday’s session, investors await the US Initial jobless Claims data for the week ending January 10 and the US Retail Sales data for December, which will be published at 13:30 GMT.
Daily digest market movers: EUR/USD consolidates while Euro’s outlook remains uncertain
- The sideways move in the EUR/USD pair is also driven by the Euro’s (EUR) mixed performance against its major peers on Thursday. However, the broader outlook of the Euro will remain bearish as investors expect the European Central Bank (ECB) to continue reducing interest rates gradually this year.
- According to a January 10-15 period Reuters poll, all 77 economists see the ECB reducing the Deposit Facility rate by 25 basis points (bps) to 2.75% in the January meeting, and 60% of them are confident about three additional 25 bps interest rate cuts by the mid-year.
- Meanwhile, ECB officials are also comfortable with expectations that the Deposit Rate will slide to 2% by mid-summer. ECB policymaker and Governor of the Bank of France François Villeroy de Galhau said, "It makes sense for interest rates to reach 2% by the summer," as we have practically won the "battle against inflation." Villeroy added that bringing down borrowing costs will bolster the “financing of the economy” and a “drop in the household savings rate.”
- The outlook of the Eurozone economy remains vulnerable as market participants worry that higher import tariffs by the US under Trump’s administration will weigh on the export sector significantly.
Technical Analysis: EUR/USD holds recovery to near 1.0300
EUR/USD holds rebound to near 1.0300 after gaining ground from the over-two-year low of 1.0175 reached on Monday. The major currency pair bounces back on divergence in momentum and price action. The 14-day Relative Strength Index (RSI) formed a higher low near 35.00, while the pair made lower lows.
However, the outlook of the shared currency pair is still bearish as all short-to-long-term Exponential Moving Averages (EMAs) are sloping downwards.
Looking down, Monday’s low of 1.0175 will be the key support zone for the pair. Conversely, the January 6 high of 1.0437 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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