In a week abbreviated by holidays, the EUR/USD currency pair is trading within a narrow corridor around 1.0400, with trading volumes remaining thin.
European Central Bank (ECB) President Christine Lagarde has expressed confidence that inflation will return sustainably to the bank’s 2% target earlier than initially anticipated. Meanwhile, analysts at UBS project that the Federal Reserve (Fed) will implement two interest rate cuts next year, slated for June and September.
During North American trading hours on Tuesday, the EUR/USD mirrored the sideways movement of the US dollar. The US Dollar Index (DXY), which gauges the greenback against six major currencies, is fluctuating in a tight range above the crucial 108.00 support level. This subdued activity is due to the holidays in the forex markets on Wednesday and Thursday, commemorating Christmas Day and Boxing Day respectively.
The dollar’s broader outlook remains robust as the Fed has signaled fewer rate cuts for 2025. In the latest dot plot, the Fed indicated just two rate cuts next year, a reduction from the four cuts it had projected in September. UBS analysts specifically foresee 25-basis-point cuts in the June and September policy meetings.
Recent remarks from Fed officials suggest a more cautious stance on rate cuts. Stubborn inflation, a labor market in better shape than expected, and the uncertainty surrounding the economic impact of President-elect Donald Trump’s incoming policies have all contributed to this more measured approach.
Looking ahead, investors will zero in on the US Initial Jobless Claims data for the week ending December 20, set to be released on Thursday. Given the sparse US economic calendar, this data will be under the microscope. Economists estimate that the number of first-time jobless claimants was 218,000, down from the previous figure of 220,000.
Daily Digest Market Movers: EUR/USD Under Pressure Amid ECB Dovish Expectations
In Tuesday’s North American session, the EUR/USD is consolidating within a tight range around 1.0400, and the overall bias for this major currency pair is bearish. The euro weakened marginally on Monday after ECB President Lagarde told the Financial Times that the central bank is “very close” to declaring victory over inflation, with the headline rate having dropped to 2.2%, though she cautioned about remaining vigilant regarding high service inflation, which stands at 3.9%.
When questioned about potential US tariffs under President-elect Trump, Lagarde opined that retaliation is a poor strategy, as the cycle of trade restrictions and countermeasures is detrimental to the global economy.
Dovish expectations for the ECB in 2025 persist, given the firm belief that Eurozone inflation will hit the 2% target. Traders are pricing in a 25-basis-point reduction in the ECB’s Deposit Facility rate during each of its next four policy meetings.
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Dollar Holds Steady as U.S. Inflation Moderates, Yen Nears Intervention Threshold
GBP/USD’s Reaction to US Data and BoE Move: A Rebound with Constraints
