- EUR/USD drops below the two-year low of 1.0330 as the US Dollar strengthens further.
- The USD rises on the Fed’s signal for fewer rate cuts in 2025.
- Markets anticipate the ECB will reduce rates by 25 bps at each meeting through June.
EUR/USD hits a fresh two-year low below 1.0320 on the first trading day of the year as the US Dollar (USD) continues to strengthen. The Dollar Index (DXY) climbs above 108.60, buoyed by optimism that the Federal Reserve (Fed) will implement fewer rate cuts than previously anticipated in 2025.
In 2024, the Fed reduced its key interest rates by 100 basis points (bps) amid concerns over employment risks. However, a robust US economic outlook and a slowdown in disinflation have led to a more cautious approach for 2025, with policymakers signaling fewer cuts ahead. The Fed’s latest dot plot forecasts Federal Fund rates at 3.9% by the end of 2025, up from the 3.4% projection in September.
The CME FedWatch tool indicates near certainty that the Fed will maintain interest rates at 4.25%-4.50% during its January meeting. Looking ahead, market focus shifts to Friday’s US ISM Manufacturing PMI data for December, expected to dip slightly to 48.3 from 48.4, signaling a modest acceleration in contraction for the manufacturing sector.
Daily Digest Market Movers: EUR/USD Under Pressure as Euro Weakens
- Euro Outlook: EUR/USD continues to decline as the Euro faces selling pressure, driven by expectations of a steady rate-cut cycle by the European Central Bank (ECB) through June. This policy could result in four rate cuts, lowering the Deposit Facility rate to 2%.
- Policy Easing: Market participants anticipate further easing as Eurozone inflation trends align with the ECB’s 2% target.
- Export Challenges: Investors also factor in potential declines in European exports due to higher US import tariffs under incoming President Donald Trump’s administration.
- Inflation Focus: Preliminary German and Eurozone Harmonized Index of Consumer Prices (HICP) data for December, set for release next week, will provide crucial insights into the ECB’s future rate-cut pace. A steady reduction of 25 bps per meeting is expected, though a pivot to 50 bps remains possible.
- ECB Commentary: Irish central bank chief Gabriel Makhlouf stressed the need for gradual rate cuts in light of persistent concerns about services inflation in the Eurozone, warning against abrupt policy changes unless new evidence emerges.
- Manufacturing PMI: Final HCOB Manufacturing PMI data for December showed factory activity contracted slightly faster at 45.1, down from a preliminary reading of 45.2.
Technical Analysis: EUR/USD Falls Below Two-Year Low at 1.0330
EUR/USD slips beneath the two-year low of 1.0330 during Thursday’s European session, reinforcing its bearish outlook. The declining 20-day and 50-day Exponential Moving Averages (EMAs), positioned at 1.0433 and 1.0556 respectively, underline the downward trend. Additionally, the 14-day Relative Strength Index (RSI) drops below 40, signaling strong bearish momentum.
On the downside, the pair could target support around the 1.0200 mark, while resistance at the psychological level of 1.0500 remains a key challenge for bullish recovery efforts.
