EUR/USD stays under pressure as ECB officials support more rate cuts
- EUR/USD sees more downside below 1.0500 as ECB policymakers are concerned about growing risks to Eurozone economic growth.
- ECB’s Villeroy supports more rate cuts as the balance of risks to inflation and growth is shifting to the downside.
- Investors will pay close attention to the flash Eurozone/US PMI data for November on Friday.
EUR/USD remains vulnerable above the psychological support of 1.0500 in European trading hours on Thursday. The major currency pair faces selling pressure due to the Euro’s weak performance on expectations that the European Central Bank (ECB) could accelerate its policy-easing cycle.
The ECB is widely anticipated to cut its Deposit Facility Rate again by 25 basis points (bps) to 3% in the December meeting and is expected to head towards the neutral range faster in 2025 as market participants worry about the Eurozone’s economic outlook.
Investors expect the European Union (EU) to go through a rough time when US President-elect Donald Trump takes office and implements his economic agenda, which would lead to a potential global trade war, especially with the Eurozone and China. In his election campaign, Trump mentioned that the euro bloc will "pay a big price" for not buying enough American exports.
ECB officials are also worried about growing risks to Eurozone economic growth and want the central bank to continue reducing the degree of monetary policy tightness through interest rate cuts. ECB policymaker and the Governor of the Bank of France François Villeroy de Galhau said on Wednesday in a speech in Tokyo, “The balance of risks on growth and inflation is shifting to the downside.” Villeroy added that the pace of future ECB rate cuts should be guided by "agile pragmatism". However, he ruled out the significant impact of US tariffs on the Eurozone’s inflation outlook.
To know about the current status of economic health and forward demand, investors will focus on the flash HCOB Purchasing Managers Index (PMI) data for November for the Eurozone and its major nations, which will be released on Friday. Flash readings are expected to show that the overall private business activity remains at the expansionary borderline.
Daily digest market movers: EUR/USD weakens as US Dollar eyes more gains
- EUR/USD edges down as the US Dollar (USD) holds its Wednesday’s recovery and strives to refresh yearly highs. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gathers strength to break above the immediate high of 107.00. The Greenback had been performing stronger on Donald Trump’s victory in both houses as he will be able to implement his trade and tax policies smoothly.
- The consequences of Trump’s policies will be inflationary for the United States (US) economy, restricting the Federal Reserve (Fed) from cutting interest rates deeply. The impact can be seen in market speculation for Fed interest rate cuts in December, which has been diminished significantly. Fed’s probability for lowering borrowing rates next month has eased to 56% from 73% a week ago, according to the CME FedWatch tool.
- Market experts have also upwardly revised the Federal Funds Rate target for 2025. Bank of America (BofA) has upped its terminal fed funds rate forecast to 3.75%-4.00% from 3.00%-3.25%.
- Going forward, the US Dollar will be guided by the preliminary S&P Global PMI data for November, which will be published on Friday. Economists expect the overall private sector activity to have improved.
Technical Analysis: EUR/USD struggles above 1.0500
EUR/USD strives to hold the key support of 1.0500. The outlook of the major currency pair remains bearish as all short- to long-term Exponential Moving Averages (EMAs) are declining.
The 14-day Relative Strength Index (RSI) oscillates in the bearish range of 20.00-40.00, adding to evidence of more weakness in the near term.
Looking down, the pair is expected to find a cushion near the October 2023 low at around 1.0450. On the flip side, the round-level resistance of 1.0600 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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