EUR/USD declines as US Dollar strengthens amid risk-off mood, Fed-ECB policy meetings in focus

EUR/USD falls sharply to near 1.0420 as the safe-haven appeal of the US Dollar has strengthened in a risk-off environment.
The Fed is expected to leave interest rates unchanged, while the ECB is set to cut them by 25 bps, both this week.
US Treasury Bessent proposes a 2.5% tariff hike universally, which will increase at the same pace every month.

EUR/USD tumbles to near 1.0420 in Tuesday’s European session and is currently trading around 1.0442 at the time of writing. The major currency pair weakens as the US Dollar (USD) strengthens amid a global sell-off in technology, power, and data center stocks, which has increased its safe-haven appeal. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, surges to near 108.00.

Investors are dumping technology stocks as Chinese DeepSeek’s low-cost Artificial Intelligence (AI) model has challenged the dominance of current AI players and their related entities across the globe.

Meanwhile, deepening uncertainty over US President Trump's universal tariff plan and the Federal Reserve’s (Fed) monetary policy announcement on Wednesday has also strengthened the US Dollar. Soon after being selected as US Treasury Secretary, Scott Bessent proposed the plan of imposing a universal 2.5% tariff plan, which will increase graduallyeach month until reaching Trump’s guidance of 20%.

Market experts believe that the gradual introduction of tariffs will give more time for the US to negotiate harder and close better deals with their trading partners.

On the monetary policy front, the Fed is almost certain to leave interest rates unchanged in the range of 4.25%-4.50%. Therefore, investors will mainly focus on Fed Chair Jerome Powell’s press conference after the policy decision for fresh interest rate guidance. Analysts at Macquarie expect that Powell is unlikely to offer much in this regard other than emphasizing the “data dependence of future decisions” while highlighting “uncertainty about the neutral rate”.

Daily digest market movers: EUR/USD slides as Fed-ECB monetary decisions loom large

EUR/USD weakens amid strength in the US Dollar. The Euro (EUR) trades cautiously against its major peers as investors await the European Central Bank’s (ECB) interest rate decision, which will be announced on Thursday. Investors expect the ECB to cut its Deposit Facility rate by 25 basis points (bps) to 2.75% amid a sluggish Eurozone economic outlook and confidence that inflationary pressures will sustainably return to the central bank’s target of 2%.
Given that traders have fully priced in a 25 bps interest rate reduction from the ECB, investors will pay close attention to President Christine Lagarde’s press conference to know the impact of Trump’s tariffs, if imposed, on the economic and monetary policy outlook.
Christine Lagarde warned last week at the World Economic Forum (WEF) in Davos that Europe must “anticipate what will happen” and be “prepared in order to respond,” as Trump’s tariffs would be “selective” and “focused.”
Analysts at Citi expect the ECB to reduce interest rates by 25 bps at every meeting "until at least the summer".

Technical Analysis: EUR/USD faces pressure near 50-day EMA

EUR/USD struggles around the 50-day Exponential Moving Average (EMA), which trades around 1.0456 since the last two trading days on Tuesday. The major currency pair corrects to near 1.0420 after failing to extend its upside move above the key resistance of 1.0530. The near-term outlook remains firm as the pair holds the 20-day EMA, which trades around 1.0390.

On the downside, the downward-sloping trendline from the 30 September 2024 high of 1.1209 will act as major support for the Euro bulls.

The 14-day Relative Strength Index (RSI) struggles to climb above the 60.00 hurdle, suggesting that the trend would be sideways.

Looking down, the January 20 low of 1.0266 will be the key support zone for the pair. Conversely, the December 6 high of 1.0630 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.