EUR/USD gains as US Dollar edges lower in holiday-curtailed week

EUR/USD moves higher to near 1.0430 in a thin trading volume day, while its broader outlook remains weak amid a firm US Dollar.
Investors expect the ECB to reduce its Deposit Facility rate by a further 100 bps next year.
US Initial Jobless Claims for the week ending Dec 20 surprisingly fell to 219K.

EUR/USD rises to near 1.0430 in Friday’s North American session amid thin trading following the Christmas and Boxing Day holidays. The major currency pair gains as the US Dollar (USD) ticks lower despite firm expectations that the Federal Reserve (Fed) will follow a gradual policy-easing path as inflation has rebounded slightly in the last three months.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to hold the crucial support of 108.00. The performance of the USD has remained upbeat in the last few months in part by expectations of firm growth under the administration of United States (US) President-elect Donald Trump and growing speculation of a slowdown in the Fed’s easing cycle.

The latest Fed dot plot showed that policymakers see Federal fund rates heading to 3.9% by the end of 2025. This suggests that there will be two interest rate cuts next year instead of the four trims previously anticipated.

Despite the latest signs from the dot plot, analysts at BCA research say that the Fed will cut rates by more than 50 basis points (bps) next year amid expectations that price pressures will undershoot central bank’s target of 2% and the jobless rate will rise over Fed’s forecast of 4.3%. The report added that fewer interest rate cuts would require a “significant improvement in labor market momentum, a trend shift we don’t view as particularly likely”.

On the economic front, US Initial Jobless Claims data for the week ending December 20 were lower than expected. Surprisingly, the number of individuals claiming jobless benefits for the first time fell to 219K from the previous release of 220 K. Economists expected the number of jobless claims to be higher, at 224 K.

Daily digest market movers: EUR/USD ticks higher even though Euro's outlook remains sugglish

EUR/USD broadly struggles for direction at the year-end while the overall outlook of the Euro (EUR) remains downbeat as the European Central Bank (ECB) is expected to continue pushing interest rates lower at the current pace until the first half of 2025.
The ECB has already reduced its Deposit Facility rate by 100 bps this year and is expected to deliver another 100-bps interest rate reduction next year as the Eurozone inflation has come under control. Still, inflation is higher than the central bank’s target of 2%.
ECB President Christine Lagarde said on Monday that she is confident about further progress in the disinflation trend. “We're getting very close to that stage when we can declare that we have sustainably brought inflation to our medium-term 2%”, Lagarde said in an interview with the Financial Times (FT). However, she still believes that “we (policymakers) should be very vigilant about inflation in the services sector.”
Recent commentaries from almost all ECB policymakers have indicated that they have agreed to market expectations for a consistent reduction in interest rates until the benchmark deposit rate reaches 2%, which they see as a neutral rate, to avoid risks of inflation undershooting the bank’s target of 2%.

Technical Analysis: EUR/USD stays broadly in limited range around 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 asset 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.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact 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. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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