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- EUR/USD aims for parity amid Fed-ECB policy divergence
EUR/USD aims for parity amid Fed-ECB policy divergence
- EUR/USD finds interim support near 1.0220; however, more downside looks likely.
- The Fed is expected to cut interest rates two times this year.
- Investors await the US ISM Manufacturing PMI and the German HICP data for December.
EUR/USD finds temporary support in Friday’s European session after diving to near 1.0220 on Thursday, the lowest level seen in over two years. Market experts see the major currency pair falling further to parity on Federal Reserve (Fed) – European Central Bank’s (ECB) divergent views on the monetary policy outlook.
On the left side of the Atlantic, Fed officials have guided less interest rate cuts in 2025, while on the right, ECB policymakers see the continuation of the policy-easing cycle at the current pace.
According to the latest dot plot in the Fed’s Summary of Economic Projections, Fed officials see Federal fund rates heading to 3.9% by year-end. This indicates that policymakers expect two interest rate cuts this year, compared to four forecasted in September.
Market participants have also trimmed Fed dovish bets. They expect policies under President-elect Donald Trump's administration, such as tight immigration, higher import tariffs, and lower taxes, to boost the growth rate and inflationary pressures in the United States (US) economy.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges down on Friday but is still close to its highest level in two years, above 109.00.
Going forward, investors will pay close attention to a slew of US labor market-related economic indicators, which will influence Fed interest rate expectations. Currently, the Fed is almost certain to keep interest rates steady in the range of 4.25%-4.50% in January’s policy meeting.
In Friday’s session, the US Dollar will be guided by the US ISM Manufacturing Purchasing Managers Index (PMI) data for December, which will be published at 15:00 GMT. The PMI is expected to remain at 48.4, suggesting that manufacturing sector activities contracted at a steady pace.
Daily digest market movers: EUR/USD is prone to more downside amid heavy ECB dovish bets
- EUR/USD is unlikely to hold the immediate support of 1.0220 as traders have priced in 113 basis points (bps) interest rate reduction by the ECB this year, according to xxxxx. This suggests that there will be at least four interest rate cuts of 25 bps on the backdrop of deepening risks of Eurozone inflation undershooting the central bank’s target of 2%.
- ECB officials are also comfortable with market pricing in four interest rate cuts. On Thursday, ECB Governing Council member and Governor of Bank of Greece Yannis Stournaras said in an interview on Skai Radio that the base interest rates of the central bank should fall to “around 2%” near the “autumn of this year”. This indicates that the ECB will cut its Deposit Facility rate in each of its next four policy meetings.
- Apart from the risks of inflation remaining persistently lower, weak economic activity and the likely impact of a trade war with the US on the Eurozone’s exports sector have also boosted the ECB's dovish bets. On Thursday, the HCOB Manufacturing PMI for December, compiled by S&P Global, showed that manufacturing sector activity contracted at a slightly faster pace than the preliminary reading. The Manufacturing PMI came in at 45.1, compared to the flash estimate of 45.2.
- Going forward, investors will focus on the preliminary German and Eurozone Harmonized Index of Consumer Prices (HICP) data for December, which will be released on Monday and Tuesday, respectively.
Technical Analysis: EUR/USD sees more downside to near 1.0100
EUR/USD faced a sharp sell-off after breaking below the two-year low of 1.0330 on Thursday. The outlook of the major currency pair is broadly bearish as the 20-week Exponential Moving Average (EMA) at 1.0620 is declining.
The 14-week Relative Strength Index (RSI) slides to near 30.00, indicating a strong downside momentum. However, a slight recovery cannot be ruled out as the momentum oscillator has turned oversold.
Looking down, the pair could find support near the round-level support of 1.0100. Conversely, the weekly high of 1.0458 will be the key barrier for the Euro bulls.
Euro FAQs
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%).
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.
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.
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.
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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