- EUR/USD struggles near 1.0600 as ECB policymakers prioritize concerns over economic growth over inflation control.
- ECB’s Panetta advocates for an expansionary monetary policy to avoid inflation falling significantly below the bank’s target.
- Deutsche Bank predicts the Fed will cut interest rates in December, though it anticipates a tight decision.
EUR/USD remains under pressure near 1.0600, slipping to around 1.0560 during Wednesday’s European session. The pair weakens as the US Dollar (USD) rebounds sharply, driven by expectations of fewer interest rate cuts from the Federal Reserve (Fed) in its upcoming monetary policy adjustments.
The Fed’s cautious, data-driven strategy suggests a restrained approach to rate cuts, with market analysts anticipating a rebound in U.S. inflation and stronger economic growth. These expectations are bolstered by President-elect Donald Trump’s electoral victory in both houses, which is likely to enable smooth implementation of his economic agenda.
Trump has pledged to impose a universal 10% import tariff and reduce taxes, measures that would limit the Fed’s ability to pursue deeper rate cuts. For December, the Fed is projected to lower borrowing rates by 25 basis points (bps) to the 4.25%-4.50% range, though Deutsche Bank analysts describe the decision as a “close call.”
Meanwhile, the US Dollar Index (DXY), which tracks the USD against six major currencies, has bounced to approximately 106.30 from a recent low of 106.10. On Tuesday, the DXY exhibited significant volatility amid escalating tensions in the Russia-Ukraine conflict.
The USD gained safe-haven appeal in the European session after Russian President Vladimir Putin approved revisions to the country’s nuclear doctrine in response to Ukraine’s use of long-range missiles, reportedly supplied with U.S. approval by President Joe Biden. However, the safe-haven demand moderated later as Russian Foreign Minister Sergei Lavrov assured that Russia would "do everything possible" to avoid a nuclear war, as reported by Reuters.
Daily Market Digest: EUR/USD Retreats on ECB Dovish Outlook
- EUR/USD's recovery has stalled amid negative sentiment towards the Eurozone, driven by ongoing geopolitical tensions, a weak economic outlook, and political uncertainty in Germany.
- European Central Bank (ECB) officials are prioritizing growth preservation over controlling inflation, as President Trump's tariffs are expected to negatively impact overall economic output. ECB policymaker and Bank of Italy Governor Fabio Panetta stated in a speech at Bocconi University in Milan that, with inflation near target and domestic demand stagnant, restrictive monetary conditions are no longer necessary. He warned that if the economy does not recover, inflation may stay well below the ECB's target.
- Regarding interest rates, Panetta emphasized that the ECB should focus on addressing the sluggish real economy and may need to move key borrowing rates into "neutral or even expansionary" territory, as reported by Reuters.
- The ECB’s semi-annual Financial Stability Review also highlighted that "economic growth remains fragile."
- In its final monetary policy meeting of the year on December 12, the ECB is expected to cut its Deposit Facility Rate by 25 basis points (bps) to 3%, marking the fourth rate cut of the year and the third consecutive one.
- On the economic front, Eurozone Q3 Negotiated Wage Rates showed a rise to 5.42%, up from the previous quarter's 3.54% (revised from 3.55%). This data, a key measure of wage growth, influences consumer spending.
Technical Analysis: EUR/USD Faces Selling Pressure Near 1.0500
EUR/USD remains anchored at the critical support level of 1.0500 but struggles to break above 1.0600. The outlook for the pair remains bearish, with all short- to long-term daily Exponential Moving Averages (EMAs) showing a downward trend.
The 14-day Relative Strength Index (RSI) is trapped in the bearish zone between 20.00 and 40.00, signaling further potential weakness in the near term.
To the downside, the pair may find support around the October 2023 low near 1.0450. On the upside, the 1.0600 level remains a key resistance point for any potential recovery.
