EUR/USD slides on ECB dovish bets, firm US Dollar ahead of US inflation

EUR/USD tests region below 1.0500 as the Euro (EUR) weakens, weighed by expectations of further ECB interest-rate cuts.
The ECB is expected to cut its Deposit Facility rate by 25 bps on Thursday for the third meeting in a row.
Investors await the US inflation data for fresh interest-rate guidance.

EUR/USD extends its downside around the psychological support of 1.0500 in Wednesday’s European session. The major currency pair weakens due to US Dollar (USD) strength ahead of the United States (US) Consumer Price Index (CPI) data for November, which will be published at 13:30 GMT, and the European Central Bank (ECB) interest rate meeting on Thursday.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, climbs above 106.50.

Economists expect annual headline inflation to have accelerated to 2.7% from the October reading of 2.6%. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have risen steadily by 3.3%. The month-on-month headline and core CPI are estimated to have grown by 0.3%.

The impact of the inflation data shouldn’t significantly tweak market expectations for the Federal Reserve’s (Fed) likely interest rate action in the policy meeting on December 18 unless there is a dramatic deviation from what’s expected. Recent commentaries from a majority of Fed officials have indicated that they are confident about inflation remaining on a sustainable path towards the bank’s target of 2%.

According to the CME FedWatch tool, the probability for the Fed to reduce interest rates by 25 bps to 4.25%-4.50% is almost 90%.

Daily digest market movers: EUR/USD faces selling pressure ahead of US CPI data

EUR/USD is down on firm expectations that the European Central Bank (ECB) will reduce its Deposit Facility rate by 25 basis points (bps) to 3% in the policy meeting on Thursday. As for the ECB, a rate cut would be the third straight one in a row and the fourth this year.
A 25-bps interest rate reduction by the ECB is widely anticipated as policymakers are increasingly convinced that inflation is under control and increasing signs that Eurozone business activity is struggling. Meanwhile, a handful of ECB officials see risks of inflation undershooting the central bank’s target due to potential tariff threats by US President-elect Donald Trump and weak domestic demand.
With traders pricing in an ECB rate cut on Thursday, investors will pay close attention to President Christine Lagarde’s comments in the press conference after the policy decision for fresh interest-rate guidance. Lagarde could deliver somewhat dovish remarks due to political instability in Germany and France and the potential adverse impact of Trump’s tariffs on the export sector.
Meanwhile, German Chancellor Olaf Scholz is set to submit a request for a no-confidence vote on December 16, a necessary precursor for holding elections on February 23, 2025, Reuters report. German government collapsed after Olaf dismissed Finance Minister Christian Lindner, dissolving the three-party coalition.

Technical Analysis: EUR/USD seems weak around 1.0500

EUR/USD struggles near the psychological figure of 1.0500. The outlook of the major currency pair remains bearish as the 20-day EMA near 1.0565 acts as key resistance for the Euro (EUR) bulls.

The 14-day Relative Strength Index (RSI) wobbles near 40.00. Should the RSI fall below this level, a bearish momentum will trigger.

Looking down, the November 22 low of 1.0330 will be a key support. On the flip side, the 50-day EMA near 1.0700 will be the key barrier for the Euro bulls.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

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