The EUR/USD currency pair has witnessed a downward slide, reaching close to 1.0530 as investors closely watch crucial events such as the release of US inflation data and the upcoming European Central Bank (ECB) monetary policy meeting.
Anticipation is high that the ECB will cut its Deposit Facility Rate by 25 basis points (bps) to 3% during its meeting on Thursday. This would mark the third consecutive interest rate cut decision by the ECB.
In Tuesday’s European session, the EUR/USD pair dropped as traders grew cautious ahead of the ECB meeting. Market experts believe that multiple factors, including Donald Trump’s victory in the US Presidential elections, political unrest in France and Germany, and a significant slowdown in Eurozone business activity, have led financial market participants to factor in an interest rate reduction this Thursday.
The political instability in France and Germany, being the two largest economies in the Eurozone, could directly impact the region’s economic growth and put pressure on prices. Meanwhile, the impact of Trump’s tariffs on Eurozone inflation once he takes office remains uncertain. ECB policymakers are divided on whether these tariffs will be inflationary or deflationary for the Eurozone economy. Some policymakers think the tariffs will weaken the Euro (EUR) against the USD significantly, making imports more expensive for consumers and increasing price pressures. Others, however, foresee risks of inflation falling below the bank’s target as higher tariffs could dampen the Eurozone’s export sector.
Daily Digest of Market Movers:
The EUR/USD is on a decline as the US Dollar (USD) gains strength, with investors eagerly awaiting the release of the US Consumer Price Index (CPI) data for November, which is set for Wednesday. The inflation report is projected to show that the annual headline CPI grew at a faster pace of 2.7% compared to the previous release of 2.6%. The core CPI, which excludes volatile food and energy prices, is expected to rise steadily by 3.3%.
The inflation data is unlikely to have a major impact on the Federal Reserve (Fed) interest rate expectations for the policy meeting on December 18, unless it significantly deviates from forecasts. According to the CME FedWatch tool, there’s nearly a 90% probability that the Fed will reduce interest rates by 25 bps to a range of 4.25%-4.50%. Analysts at Macquarie concur with the market’s expectations for a Fed rate cut next week but anticipate the central bank to offer a somewhat hawkish interest rate guidance. They state that “the recent slowdown in the pace of US disinflation, a lower Unemployment Rate than what the Fed projected in September, and exuberance in US financial markets are contributing to this more hawkish stance.”
Technical Analysis:
The EUR/USD pair is facing pressure near the 20-day Exponential Moving Average (EMA). It hovers above the psychological level of 1.0500. The outlook for this major currency pair remains bearish as the 20-day EMA, near 1.0573, serves as a key resistance for the Euro bulls. The 14-day Relative Strength Index (RSI) rebounded after reaching oversold conditions and climbed above 40.00, indicating that the bearish momentum has eased somewhat. Nevertheless, the broader bearish trend for the pair doesn’t seem to be over yet. Looking downward, the November 22 low of 1.0330 will be a crucial support level. On the upside, the 50-day EMA near 1.0700 will pose a significant barrier for the Euro bulls.
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