The EUR/USD has rebounded to the $1.05 range after dipping below this month's earlier low of 1.0460, where traders appeared to take profits following a five-day decline. Despite the recovery, the outlook for the EUR/USD remains bleak. This sentiment is further compounded by ECB President Christine Lagarde's remarks, which were more balanced than expected considering the challenging political and economic landscape in the Eurozone. As traders prepare for what might be the final significant week of the year, all eyes are on next week's meetings of the Fed and other central banks, which are anticipated to set the tone for rate expectations. The technical level of 1.0500 has emerged as a critical point to monitor.
Dollar Remains Strong Ahead of FOMC Meeting
The recent US Consumer Price Index (CPI) release did not yield any significant surprises, although the Producer Price Index (PPI) data came in stronger than anticipated. As a result, traders are confidently positioning themselves for a 25-basis-point rate cut during the Federal Reserve's final meeting of the year on Wednesday. With this reduction almost fully priced in, the Fed has limited leeway to diverge from expectations without causing substantial market upheaval. The key remaining question is whether the Fed will pause rate cuts in early 2025 or maintain the pace by continuing with 25-basis-point reductions.
Comments from Jerome Powell last month highlighted easing downside risks for the labor market, while inflation has remained persistent. This scenario has intensified speculation regarding a potential hawkish cut. Therefore, Powell's statements during the upcoming press conference and the Fed's forward guidance will be vital. The updated projections for the economy and interest rates will significantly influence market sentiment.
In my view, the likelihood of a hawkish rate cut seems plausible. President-elect Trump's administration is expected to implement policies including immigration reforms, tariffs, and tax reductions, which should encourage the Fed to adopt a more cautious approach to easing through 2025. This should lend continued support to the dollar, projecting a moderately bearish EUR/USD outlook.
PMIs and Central Bank Decisions to Impact EUR/USD Outlook
Next week will feature significant announcements from the US Federal Reserve (on Wednesday) and both the Bank of England and the Bank of Japan (on Thursday). While fewer crucial macroeconomic releases are expected until the new year, traders should pay close attention to the global Purchasing Managers' Indices (PMIs) released on Monday, as these could affect major FX pairs and market indices ahead of the pivotal rate meetings. Given the Eurozone's economic struggles, both German and French data will be critical for the EUR/USD assessment. Recently, following a 25-basis-point rate cut by the European Central Bank, the immediate market response indicated positive movement in the DAX but negative implications for the EUR/USD, suggesting skepticism among traders about reaching a bottom for this currency pair.
Technical EUR/USD Outlook: Key Levels to Monitor
Current market conditions show the EUR/USD under pressure, particularly around the pivotal 1.05 level. The pair's difficulty in making substantial upward movements highlights its current vulnerability. A weekly close below 1.05 could serve as a bearish signal, potentially leading to a retest of the November low at 1.0333, with the chance of further declines.
Conversely, bullish traders will need to wait for a definitive indicator of strength. The EUR/USD has approached the resistance zone around 1.06 (1.0595–1.0610) but has yet to break through convincingly. A firm move above this level might initiate a short-squeeze rally towards 1.0700, with additional targets near 1.0780.
Another bullish scenario to consider is if the pair dips below the November low at 1.0333 but quickly regains that level, creating a false-break reversal pattern.
In either case, confirmation of trends is crucial. My current bias remains to seek bearish setups at resistance, particularly aligning with previous support zones.
-- Written by a Market Analyst
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