The EUR/USD pair experienced a downturn on Monday, unable to sustain its earlier gains and ending lower. As of today, the pair has continued on a downward trend with the European Central Bank's upcoming rate decision and crucial US inflation data looming. These events are crucial as they precede the Federal Reserve’s own rate decision, setting the tone for an influential couple of weeks ahead. Given this context, the EUR/USD outlook appears modestly bearish, especially following Monday’s fleeting market optimism fueled by anticipated stimulus measures in China.
China's Export Growth Declines While Imports Plummet
Despite earlier announcements of a forthcoming "moderately loose" policy for next year, which had sparked a rally for currencies like the AUD and stocks linked to China, fresh economic data has reversed these gains. The latest trade figures dramatically highlight the weakness of China’s economy, underscoring the urgent need for government intervention through monetary and fiscal measures as worries escalate over potential trade tariffs from the incoming US administration.
According to recent trade statistics, China's export growth has sharply slowed to 6.7% year-on-year, totaling $312.3 billion. This is a significant drop from October's 12.7% increase and falls short of the anticipated 8.5% growth rate. On the flip side, imports have contracted by 3.9%, marking the steepest decline since September 2023, contrary to expectations of a slight 0.3% rise.
This data indicates weakening global demand for Chinese products, as foreign businesses are increasingly reducing their reliance on China amidst possible trade tariffs from the new US administration. Domestically, the lack of import activity hints at waning demand, even with recent economic stimulus efforts. This poor performance is detrimental for Eurozone exports to China, thus exerting additional negative pressure on the euro, despite signals of forthcoming stimulus measures. Investors will be looking closely at the Central Economic Work Conference starting Wednesday for insights into China's fiscal strategies.
US Inflation Data Expected to Take Spotlight Midweek
As anticipation builds for the ECB’s rate decision, midweek will be dominated by US inflation statistics, with the Consumer Price Index (CPI) set for release on Wednesday and the Producer Price Index (PPI) on Thursday. CPI is forecasted to tick up to 2.7% year-on-year from 2.6%, representing the last major data point before the Federal Reserve's meeting.
While the impending December rate decision is unlikely to hinge on this CPI figure, an unexpectedly high number could influence the Fed's direction for early 2025. Following Friday’s disappointing Non-Farm Payroll report, market expectations for a December rate cut have climbed to 87%, up from 70% just a week prior. Thus far, this sentiment has not significantly shifted the EUR/USD direction but continues to limit upside potential, as investors appear to favor the dollar amidst anticipated fiscal policies from the new administration, which are expected to increase spending and reduce taxes, perpetuating inflation risks. In this light, we maintain a bearish stance on the EUR/USD.
ECB Likely to Implement a 25 Basis Point Rate Reduction
The next significant event for EUR/USD traders will be the European Central Bank’s rate meeting on Thursday. Market analysts predict the ECB will proceed with a standard rate cut of 25 basis points, lowering the deposit rate from 3.40% to 3.15%. While there were speculative talks regarding a potential larger cut of 50 basis points, a more measured approach seems plausible, paving the way for additional reductions in 2025.
The recent release of Sentix Investor Confidence data could bolster arguments for adopting more dovish policies. Alongside economic indicators, political uncertainties—particularly recent budget negotiations in Berlin and Paris collapsing—continue to challenge growth forecasts. Should the ECB's stance turn out to be more dovish than market expectations, it could further exacerbate the bearish trend for EUR/USD.
Technical EUR/USD Outlook: Key Levels to Monitor
Analysis of the 4-hour chart indicates ongoing bearish pressure for the EUR/USD. The pair has consistently tested the resistance range around 1.06 (1.0595 to 1.0610) without achieving a definitive break above. A break through this zone could potentially provoke a short-squeeze rally towards 1.0700, with subsequent targets around 1.0775 and 1.0780. At present, however, bullish momentum remains stalled without significant reversal indicators.
Downside risks remain pronounced; a breach of the bullish trend line could place bulls in a precarious position. The 1.0500 support zone is crucial, and a drop below this level could reignite the bearish trend that commenced in September. The pivotal trigger level to watch is 1.0472, the low reached before the recent upswing. A break beneath it could target the liquidity level around 1.0333, the November low, followed by key psychological levels such as 1.0300 and 1.0200, potentially revisiting parity.
In Summary…
The EUR/USD outlook remains modestly bearish, with renewed selling pressure likely unless the ECB delivers a notably hawkish surprise or US CPI data falls significantly short of expectations—scenarios that appear unlikely in both cases.
