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.