EUR/USD trades with caution as Fed’s hawkish cut boosts US Dollar’s appeal

• EUR/USD holds the immediate support of 1.0340, but the Fed’s hawkish cut weights on the pair in the broader term.
• Investors await the US PCE inflation data for fresh guidance on the US interest rate outlook.
• ECB’s Patsalides pushes back bigger rate cut prospects and supports gradual policy easing.

EUR/USD slightly recovers but trades cautiously near the yearly lows around 1.0350 in Friday’s European session. The major currency pair has been exposed to more downside ahead as the US Dollar (USD) has strengthened. However, the USD has given up intraday gains but remains broadly firm on multiple tailwinds, such as the Federal Reserve’s (Fed) hawkish policy outlook and robust United States (US) economic growth.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls back to near 108.10 after posting a fresh two-year high above 108.50 earlier in the day.

The outlook for the Greenback has firmed as the Fed signaled fewer interest rate cuts for 2025 amid robust growth rate after reducing its key borrowing rates by 25 basis points (bps) to the 4.25%-4.50% range in its policy meeting on Wednesday. In the press conference, Fed Chair Jerome Powell said that economic strength gives the central bank the ability to approach rate cuts cautiously.

Meanwhile, the US Bureau of Economic Analysis (BEA) revised the Q3 Gross Domestic Product (GDP) growth rate higher to 3.1%. The agency reported previously that the economy expanded by 2.8%.

In Friday’s session, investors will focus on the November US Personal Consumption Expenditures Price Index (PCE) data, which will be published at 13:30 GMT. Economists estimate that the annual US core PCE inflation, the Fed’s preferred inflation measure, to have accelerated to 2.9% from 2.8% in October, with monthly figures growing by 0.2% compared to 0.3% in the previous month.

Daily digest market movers: EUR/USD holds as Euro rebounds

• EUR/USD gains a temporary ground near the yearly low as the Euro (EUR) gets firm footing against the approval of taxation reforms by German lawmakers, which will result in a reduction in annual tax revenue by 14 billion euros. The scenario will leave more funds with households for disposal, which will boost demand and stimulate economic growth. Higher spending will also diminish risks of Eurozone inflation undershooting the European Central Bank’s (ECB) target of 2%, given that Germany is the largest nation in the old continent.
• Additionally, ECB policymaker and Governor of Central Bank of Cyprus Christodoulos Patsalides has pushed back expectations of bigger rate cuts for stimulating growth, a move that has also boosted the Euro’s appeal in the near term. "I personally prefer small adjustments in a gradual process as opposed to bigger interest rate cuts," Patsalides said on the assumption that the uncertainty over inflation has elevated in both directions, Reuters reported.
• Patsalides said that he would go for bigger interest rate cuts only if inflation expectations show that price pressures “will remain well below the target for a very long time.”
• Currently, traders have priced in four more interest rate cuts from the ECB next year, which will come by June 2025. The ECB has also reduced its Deposit Facility rate four times by 100 basis points (bps) to 3% this year.

Technical Analysis: EUR/USD stays above 1.0340

EUR/USD holds the key support of 1.0340 in Friday’s European session. However, the outlook of the major currency pair remains strongly bearish as all short-to-long-term Exponential Moving Averages (EMAs) are declining. 

The 14-day Relative Strength Index (RSI) slides into the bearish range of 20.00-40.00, indicating that a fresh downside momentum has been triggered.

Looking down, the pair 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.