This week, the EUR/USD currency pair is under the spotlight due to anticipated key rate decisions from the European Central Bank (ECB) and critical inflation data from the United States. These events come ahead of the Federal Reserve's own interest rate meeting scheduled for next week. The current forecast for the EUR/USD remains cautiously bearish; however, a positive sentiment emerged today, driven by investor optimism regarding potential stimulus measures from China, which is a significant export market for the Eurozone.
Market Drivers Today
The Chinese government has declared its commitment to a “moderately loose” fiscal strategy for the upcoming year, signaling possible future easing that investors are welcoming. This announcement led to a rally in Chinese equities and various assets linked to China, such as copper and commodity stocks in the FTSE index. The Euro gained some support amid hopes that a stimulus-fueled recovery in China will bolster Eurozone exports. However, currencies with closer trade connections to China, particularly the Australian Dollar, experienced the most significant gains. All eyes are now on the upcoming Central Economic Work Conference, which begins Wednesday, for clues on anticipated fiscal support from China.
ECB Rate Cut Expectations
Analysts are forecasting a standard 25 basis point cut during the ECB Governing Council meeting on Thursday. While discussions around a possible 50 basis point cut have surfaced, it is likely that a 25bp reduction will decrease the deposit rate from 3.40% to 3.15%. The accompanying press conference may hint at further cuts planned for 2025. The latest Sentix Investor Confidence data may add urgency to calls for looser policy, especially considering recent political turmoil in Paris and Berlin regarding budget talks, which could dampen growth prospects. The EUR/USD forecast may become more bearish if the ECB takes an even more dovish stance than currently expected.
US Inflation Data: The Week's Focus
This week, the US will release inflation data, starting with Consumer Price Index (CPI) figures on Wednesday, followed by Producer Price Index (PPI) on Thursday. CPI is predicted to increase to 2.7% year-over-year from the previous 2.6%. This data serves as the final key economic indicator before the Federal Reserve's meeting next week. In the wake of the recent presidential election, market participants have reduced their expectations for additional US interest rate cuts in 2025. The December rate decision is unlikely to be swayed by this CPI report unless the results are exceptionally high. However, this CPI data may influence the Fed's decisions at its early 2025 meetings, particularly as the Fed is currently more focused on employment metrics.
Following a somewhat weak Non-Farm Payroll report released last Friday, the likelihood of a 25 basis point rate cut in December has increased, with market pricing rising to approximately 87% from 70% last week. Yet, this shift has not significantly affected the EUR/USD direction thus far.
Technical Analysis: Key EUR/USD Levels
The EUR/USD has made several attempts to breach the 1.06 resistance zone (specifically within the 1.0595-1.0610 range) but has yet to secure a daily close above this level. The upcoming days may bring about a shift for the bulls, depending on market developments. A daily close above this resistance could potentially lead to a short-squeeze rally towards the 1.0700 level, possibly reaching 1.0775/80.
Conversely, as long as the 1.06 resistance remains intact, the risks lean towards the downside. A breakdown below the 1.0500 level seems more probable than a sudden upswing. The 1.0500 mark is crucial to monitor for short-term forecasts. Should there be a daily close beneath the 1.0450-1.0500 range, the EUR/USD could revert to the bearish trend initiated in September, with the next downside target falling at the recent lows around 1.0333. Following that, additional targets could include the round numbers at 1.0300 and 1.0200, on the path to potential parity.
Overall, the EUR/USD forecast is modestly bearish, with selling pressure likely to continue unless the US CPI shows weakness or the ECB adopts a less dovish position than anticipated.
-- Analysis by Market Expert
