In a thinly traded session on Monday, the EUR/USD pair climbed to a new weekly high close to 1.0450. The euro is expected to finish the year with a nearly 5.5% loss against the US dollar, largely due to the European Central Bank’s (ECB) dovish stance and potential trade tensions with the US.
This week, US investors will be closely watching the December US ISM Manufacturing PMI data. The EUR/USD surged near 1.0450 during the New York session on Monday. The pair gained ground as the preliminary Spain Harmonized Index of Consumer Prices (HICP) for December came in hotter than anticipated. Year-on-year, price pressures increased by 2.8%, surpassing the estimated 2.6% and the previous reading of 2.4%. Monthly HICP growth was also faster at 0.4% compared to the expected 0.3%. In November, underlying inflation remained flat.
However, the EUR/USD is set to close the year with a nearly 5.5% decline, especially hard hit in the last three months of 2024 as the ECB maintained its dovish guidance on interest rates. Additionally, concerns about the Eurozone’s economic growth have emerged due to expected tariff hikes from US President-elect Donald Trump, which could impact its export sector.
The ECB cut its Deposit Facility rate by 100 basis points (bps) to 3% this year and is projected to lower it to 2% (seen as a neutral rate) by the end of June 2025, implying 25 bps rate cuts at each meeting in the first half of next year. ECB policymakers have expressed concerns about inflation undershooting the 2% target, given political uncertainties in Germany and potential trade frictions with the US. ECB officials have differed in their views on how to handle the US trade situation.
Last week, ECB President Christine Lagarde stated in an FT interview that retaliation was “a bad approach” as she believes trade restrictions and tit-for-tat responses are harmful to the global economy. In contrast, ECB policymaker and Finnish central bank Governor Olli Rehn said negotiation is preferable and the EU’s negotiating position can be strengthened by showing readiness to take countermeasures against US tariff threats.
Daily Digest: EUR/USD Benefits from US Dollar Decline
EUR/USD advanced in illiquid trading conditions on Monday, taking advantage of the US dollar’s weakness. The US Dollar Index (DXY), which measures the dollar’s value against six major currencies, dropped to near 107.80 but is still likely to end the year close to its highest level. Higher Treasury yields have been a significant boost for the US dollar. US bond yields have risen sharply in recent months as investors anticipate that Trump’s policies of higher tariffs and lower taxes will fuel economic growth and inflation, potentially leading the Federal Reserve to adopt a hawkish monetary policy stance.
The Fed signaled fewer interest rate cuts for 2025 in its latest dot plot, with policymakers seeing Federal Fund rates at 3.9% by the end of 2025. After a hawkish cut in December, Goldman Sachs expects the next rate cut in March, followed by two more in June and September.
This week, investors will closely monitor the December US ISM Manufacturing Purchasing Managers’ Index (PMI) data, due for release on Friday. The PMI is expected to edge down to 48.3 from 48.4, indicating a slightly faster contraction in the manufacturing sector output.
Technical Analysis: EUR/USD Holds Key Support
EUR/USD has been consolidating in a tight range since Monday above the two-year low of 1.0335. The outlook for the pair remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0464 and 1.0588, respectively, are declining. The 14-day Relative Strength Index (RSI) hovers near 40.00, and a downward momentum could be triggered if it sustains below this level. Looking ahead, the pair could decline towards the round-level support of 1.0200 if it breaks below the two-year low of 1.0330. Conversely, the 20-day EMA near 1.0500 will act as a key resistance for euro bulls.
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