EUR/USD Trades Cautiously as Fed’s Hawkish Rate Cut Strengthens US Dollar

EUR/USD edges higher but trades cautiously near yearly lows around 1.0350 during Friday’s European session. The pair faces continued downside pressure as the US Dollar (USD) remains supported by multiple factors, including the Federal Reserve’s hawkish policy stance and robust US economic data.

The US Dollar Index (DXY), which measures the USD against a basket of six major currencies, retreats to around 108.10 after hitting a fresh two-year high above 108.50 earlier in the day. The Greenback remains underpinned by the Fed’s signal of a slower pace of rate cuts in 2025, following its decision to reduce the benchmark interest rate by 25 basis points (bps) to the 4.25%-4.50% range. Fed Chair Jerome Powell emphasized in his post-meeting remarks that the strong economy allows for a cautious approach to rate reductions.

Adding to the USD’s strength, the US Bureau of Economic Analysis (BEA) revised the Q3 Gross Domestic Product (GDP) growth rate upward to 3.1%, from the previously reported 2.8%.

Looking ahead, market participants await the release of the November US Personal Consumption Expenditures (PCE) Price Index at 13:30 GMT. Economists expect the Fed’s preferred inflation gauge, core PCE inflation, to rise to 2.9% annually from 2.8% in October, with monthly growth slowing to 0.2% from 0.3% previously. The data will provide crucial insights into the US inflation outlook and influence near-term market sentiment.

Daily Market Movers: EUR/USD Steadies as Euro Rebounds

• EUR/USD Stabilizes Near Yearly Lows: The pair gains temporary support as the Euro (EUR) finds strength following the approval of taxation reforms by German lawmakers. The reforms are expected to reduce annual tax revenue by €14 billion, leaving more disposable income for households. This increased spending is projected to stimulate economic growth and mitigate the risk of Eurozone inflation falling below the European Central Bank’s (ECB) 2% target. As Germany is the largest economy in the Eurozone, this development has broad implications for regional economic stability.
• ECB’s Gradual Approach to Rate Cuts Supports Euro: ECB policymaker and Governor of the Central Bank of Cyprus, Christodoulos Patsalides, tempered expectations for aggressive rate cuts. “I personally prefer small adjustments in a gradual process as opposed to bigger interest rate cuts,” Patsalides stated, citing heightened uncertainty surrounding inflation. He indicated he would only consider larger cuts if inflation expectations point to prolonged price pressures below target.
• Market Expectations for ECB Policy: Traders currently anticipate four additional ECB rate cuts by mid-2025. This year, the ECB has already reduced its Deposit Facility Rate by 100 basis points to 3% through four adjustments, signaling a continued focus on balancing growth and inflation risks.
• The Euro’s rebound, supported by fiscal and monetary developments, offers short-term relief for EUR/USD, though broader pressures from the US Dollar persist.

Technical Analysis: EUR/USD Holds Above 1.0340 but Bearish Bias Persists

EUR/USD trades above the crucial 1.0340 support level during Friday’s European session, though the broader outlook remains firmly bearish. All Exponential Moving Averages (EMAs) across short-to-long-term timeframes continue to trend downward, signaling sustained selling pressure.

The 14-day Relative Strength Index (RSI) has slipped into the bearish range of 20.00-40.00, suggesting that downside momentum is intensifying.

On the downside, a break below the two-year low of 1.0330 could expose the pair to further declines toward the psychological support level of 1.0200. On the upside, the 20-day EMA near 1.0500 presents a critical resistance level for Euro bulls to reclaim to shift the near-term bias.