EUR/USD trades sideways as trades reassess Fed’s monetary policy outlook

• EUR/USD wobbles around 1.0300 as the US Dollar consolidates while traders re-evaluate the Fed’s likely interest rate outlook for the entire year.
• Traders see at least one interest rate cut this year after mixed US inflation data for December.
• ECB’s Villeroy sees the deposit facility rate sliding to 2% by the mid-year.

EUR/USD consolidates around 1.0300 in Thursday’s European session. The major currency pair trades sideways, following the US Dollar (USD) footprints, while the US Dollar Index (DXY) wobbles around 109.15. The USD Index strives to recover Wednesday’s losses that were driven by mixed United States (US) Consumer Price Index (CPI) data for December.

The US CPI report showed that price pressures were broadly mixed. On a yearly basis, headline inflation accelerated expectedly, while the core reading rose at a slower-than-projected pace. Signs of mixed inflationary pressures forced traders to reassess market expectations for the Federal Reserve’s (Fed) monetary policy outlook.

According to the CME FedWatch tool, traders anticipate more than one interest rate cut this year, similar to what officials projected in December’s Summary of Economic Projections (SEP). Before Wednesday’s inflation data, traders expected the Fed to cut interest rates only once this year.

However, Fed officials are still worried about the inflation outlook amid uncertainty over incoming policies under President-elect Donald Trump’s administration. New York Fed Bank President John Williams said in a speech at the CBIA Economic Summit on Wednesday that the disinflation process is “in train”; however, the economic outlook remains highly uncertain, especially around “potential fiscal, trade, immigration, and regulatory policies.”

In Thursday’s session, investors await the US Initial jobless Claims data for the week ending January 10 and the US Retail Sales data for December, which will be published at 13:30 GMT.

Daily digest market movers: EUR/USD consolidates while Euro’s outlook remains uncertain

• The sideways move in the EUR/USD pair is also driven by the Euro’s (EUR) mixed performance against its major peers on Thursday. However, the broader outlook of the Euro will remain bearish as investors expect the European Central Bank (ECB) to continue reducing interest rates gradually this year.
• According to a January 10-15 period Reuters poll, all 77 economists see the ECB reducing the Deposit Facility rate by 25 basis points (bps) to 2.75% in the January meeting, and 60% of them are confident about three additional 25 bps interest rate cuts by the mid-year.
• Meanwhile, ECB officials are also comfortable with expectations that the Deposit Rate will slide to 2% by mid-summer. ECB policymaker and Governor of the Bank of France François Villeroy de Galhau said, "It makes sense for interest rates to reach 2% by the summer," as we have practically won the "battle against inflation." Villeroy added that bringing down borrowing costs will bolster the “financing of the economy” and a “drop in the household savings rate.”
• The outlook of the Eurozone economy remains vulnerable as market participants worry that higher import tariffs by the US under Trump’s administration will weigh on the export sector significantly.

Technical Analysis: EUR/USD holds recovery to near 1.0300

EUR/USD holds rebound to near 1.0300 after gaining ground from the over-two-year low of 1.0175 reached on Monday. The major currency pair bounces back on divergence in momentum and price action. The 14-day Relative Strength Index (RSI) formed a higher low near 35.00, while the pair made lower lows.

However, the outlook of the shared currency pair is still bearish as all short-to-long-term Exponential Moving Averages (EMAs) are sloping downwards.

Looking down, Monday’s low of 1.0175 will be the key support zone for the pair. Conversely, the January 6 high of 1.0437 will be the key barrier for the Euro bulls.