The EUR/USD currency pair experienced a decline, dipping below the crucial 1.05 threshold as prior gains diminished, marking its fourth consecutive day of losses. As the European Central Bank (ECB) prepares to announce its rate decision, traders may be hesitant to push the pair any lower, leaving open the possibility of a rebound. The recent US Consumer Price Index (CPI) data aligned with expectations, reinforcing the market's view that the Federal Reserve is likely to cut interest rates in their upcoming meeting next week. This news initially bolstered the dollar, exerting pressure on weaker currencies like the euro. However, December has historically presented challenges for the USD, raising questions about potential selling as year-end approaches. In anticipation of the ECB's rate announcement, market participants are keen to discern whether the central bank will maintain its cautious stance or indicate any shifts in their policy amidst ongoing Eurozone economic obstacles. These developments could significantly influence the EUR/USD outlook for the weeks ahead.
US CPI Reinforces Rate Cut Anticipations
The release of today’s US inflation data revealed no unexpected increases, providing traders with the catalyst to strengthen their expectations for a Federal Reserve rate cut during next week's final meeting of the year. According to the CME’s FedWatch tool, the likelihood of a 25-basis-point cut increased to over 96% following the CPI results. As it stands, a rate cut now appears to be a certainty, especially with no major US economic data scheduled before the FOMC meeting. The critical question following the anticipated cut is whether the Fed will pause further reductions in early 2025 or continue at the current pace of 25 basis points. Projections indicate that, should the Fed reduce rates by 25 basis points next week to a range of 425-450 basis points, the market is assigning only a 22% chance for an additional cut in January. Encouragingly, traders seem more inclined toward predicting the next reduction at the FOMC meeting scheduled for March 19.
ECB Poised for 25 Basis Point Rate Reduction
Amidst these developments, all eyes are on the European Central Bank, which is expected to announce a 25-basis-point rate cut this Thursday. Analysts anticipate a decline in the deposit rate from 3.40% to 3.15%. While there have been discussions around a potentially larger 50-basis-point reduction, a more measured approach seems likely at this time, paving the way for further easing in 2025. ECB President Lagarde may signal this cautious strategy, potentially triggering renewed selling in the EUR/USD as well as other euro pairs. Nonetheless, a significant portion of the ECB's dovish outlook appears to be reflected in current market prices. Observing how the EUR/USD concludes the session tomorrow may provide valuable insights into directional bias as the year draws to a close.
Recent weak economic readings, such as Monday’s disappointing Sentix Investor Confidence data, have further cemented the case for continued dovish policy from the ECB. Complicating matters, ongoing political instability, including stalled budget negotiations in Germany and France, is adding to the negative sentiment. If the ECB adopts a more dovish stance than anticipated, the EUR/USD may witness heightened downward pressure. Interestingly, despite the challenging backdrop in Europe, the euro has managed to hold around the 1.05 level, suggesting it may be nearing a bottom.
Technical EUR/USD Assessment: Key Levels and Trade Strategies
The EUR/USD remains under pressure, but given the macroeconomic context, a potential bottom may soon emerge. The focus for now lies around the 1.05 mark, where the pair has repeatedly struggled to maintain upward momentum. A close below 1.0472, the lowest point prior to the recent upward movement, would signal additional bearish potential. If this occurs, a re-test of November's low at 1.0333 may be on the horizon.
On the bullish side, any signs of strength will require patience from buyers. The EUR/USD has faced resistance in the 1.06 region (1.0595–1.0610) but has yet to decisively break through. A successful rally past this level could instigate a short-squeeze toward 1.0700, with further targets potentially around 1.0780. This represents one of two bullish scenarios currently being monitored. Alternatively, if a drop below November's low at 1.0333 occurs, but the level is quickly reclaimed, this could create a false break reversal pattern. However, confirmation is necessary in either scenario; for the time being, bearish setups around resistance levels seem to be the favored strategy.
