EUR/USD refreshes weekly high on hot Spain inflation data, decline in US Dollar

EUR/USD rises to a fresh weekly high near 1.0450 in a thin trading volume session.
The Euro is poised to end the year with an almost 5.5% loss against the US Dollar due to the ECB’s dovish guidance and the potential trade war with the US.
This week, US investors will focus on the US ISM Manufacturing PMI data for December.

EUR/USD jumps to near 1.0450 in the New York session on Monday. The major currency pair gains as the preliminary Spain Harmonized Index of Consumer Prices (HICP) data for December has come in hotter than expected. On year, price pressures rose by 2.8%, faster than estimates of 2.6% and the former release of 2.4%. Month-on-month HICP grew faster by 0.4% from expectations of 0.3%. In November, the underlying inflation remained flat.

However, the major currency pair is set to wrap up the calendar year with an almost 5.5% decline, hit particularly hard during the last three months of 2024 as the European Central Bank (ECB) maintained dovish guidance on interest rates. Additionally, market participants are worried about the Eurozone’s economic growth as incoming tariff hikes from United States (US) President-elect Donald Trump will likely jolt its export sector.

The ECB reduced its Deposit Facility rate by 100 basis points (bps) to 3% this year and is expected to lower it to 2%, which policymakers see as a neutral rate, by the end of June 2025. This suggests that the ECB will cut its key borrowing rates by 25 bps at every meeting in the first half of next year.

A slew of ECB policymakers have expressed concerns about the risks of inflation undershooting the central bank’s target of 2%, given the political uncertainty in Germany and the potential trade war with the US. ECB officials have expressed opposing views on how the continent should address the US trade situation.

Last week, ECB President Christine Lagarde said in an interview with the Financial Times (FT) that retaliation was “a bad approach” because she thinks that trade restrictions and a tit-for-tat response “is just bad for the global economy at large.”.

Contrarily, ECB policymaker and Finnish central bank Governor Olli Rehn said: "Negotiation is preferable, and the EU’s negotiating position can be strengthened by demonstrating in advance that it is ready to take countermeasures if the United States threatens Europe with higher tariffs.”

Daily digest market movers: EUR/USD gains at US Dollar's expense

EUR/USD rises in illiquid trading conditions before New Year on Monday at the expense of the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 107.80 but is on track to end the year close to its highest level of the calendar year.
Higher Treasury yields have been a key tailwind for the US Dollar. US bond yields have accelerated significantly in the past few months as investors expect incoming policies of higher tariffs and lower taxes under the administration of Trump will boost economic growth and inflation. This scenario would compel the Federal Reserve (Fed) to adopt a hawkish stance on the monetary policy.
The Fed guided fewer interest rate cuts for 2025 in its latest dot plot as policymakers collectively see Federal Fund rates heading to 3.9% by the end of 2025. After a hawkish cut in December, investment banking firm Goldman Sachs expects the central bank to deliver the next interest rate cut in March. The firm also expects that two more rate cuts will follow in June and September.
This week, investors will pay close attention to the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for December, which will be released on Friday. The PMI index is expected to edge down to 48.3 from 48.4, suggesting that manufacturing sector output contracted at a slightly faster pace.

Technical Analysis: EUR/USD holds key support of 1.0400

EUR/USD consolidates in a tight range since Monday above the two-year low of 1.0335. The outlook of the major currency 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) oscillates near 40.00. A downside momentum would trigger if it sustains below that level.

Looking down, the pair could decline to near the round-level support of 1.0200 after breaking below the two-year low of 1.0330. Conversely, the 20-day EMA near 1.0500 will be the key barrier for the Euro bulls.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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