The EUR/USD exchange rate has been under notable selling pressure, dropping below 1.0540 during Thursday’s North American trading session. A mix of moderate European inflation data and thin trading volumes, due to Thanksgiving in the US, are creating an uncertain outlook for this major currency pair. Combined with expectations around the European Central Bank’s (ECB) monetary policy and the latest moves by the US Federal Reserve, the currency market is experiencing increased volatility.
Inflation Data from Germany Shakes Expectations
Slow Growth in German Inflation
Germany’s updated inflation numbers for November painted a slightly deflated picture compared to earlier forecasts. The Harmonized Index of Consumer Prices (HICP) showed year-on-year price growth of just 2.4%, falling short of the 2.6% that economists had predicted. Even more surprisingly, the month-over-month figure declined by 0.7%, outpacing the expected 0.5% drop.
These softer-than-expected inflation figures, especially following October’s 0.4% rise, have triggered market speculation about the ECB’s potential monetary policy moves. Projections now show rising hopes of the ECB cutting interest rates by as much as 50 basis points, a larger-than-usual adjustment.
ECB’s Tightrope Walk
ECB board member Isabel Schnabel, however, sought to temper expectations in a Bloomberg interview on Wednesday. Schnabel warned against overestimating inflation risks and ruled out the possibility of the bank’s policies undershooting their targets. Her remarks suggest that the ECB remains cautious about aggressive rate cuts, given the structural challenges within the Eurozone economy.
Still, investors are paying close attention to the upcoming Eurozone-wide HICP data. The figures, due Friday, are expected to show headline inflation at 2.3% and core inflation at 2.8%.
The Dollar’s Influence on the EUR/USD
Strength and Weakness in the US Dollar
The US Dollar enjoyed a slight recovery against the Euro on Thursday, driven by thin trading volumes over the Thanksgiving holiday. The Dollar Index (DXY), a benchmark that measures the USD against other key currencies, rose to 106.40 after a dip to around 106 earlier this week.
The Fed’s expected actions in December are also influencing the DXY. Currently, there’s a 66% probability that the Fed will ease rates by 25 basis points, according to data from the CME FedWatch Tool. This would bring interest rates into the 4.25%-4.50% range. Despite an uptick in the Personal Consumption Expenditure (PCE) Price Index—an inflation gauge watched closely by the Fed—investors still perceive US monetary policy as moving dovish. If rate cuts occur, the Dollar’s upward momentum could stall, indirectly supporting the Euro.
Thin Market Liquidity Creates Volatility
Holiday trading conditions in the US have limited large-scale activity, with many investors staying on the sidelines. This lack of volume exacerbates price swings due to even minor market movements, making Thursday’s correction in the EUR/USD pair less indicative of long-term trends.
Potential Trade Tariffs Impact
Trade relations between the US and Europe are another element affecting the Euro. President-elect Donald Trump’s latest comments on tariffs have caused concerns about declining Eurozone exports. However, ECB President Christine Lagarde provided a ray of optimism during a recent Financial Times interview. She noted that Trump’s remarks lacked specificity, suggesting room for negotiation in future US-Europe trade discussions.
Lagarde remarked, “It’s difficult to make America great again if global demand is falling due to trade tariffs,” hinting at the broader economic risks of protectionism. If these tariffs are kept at bay, the Euro could see a temporary boost.
Technical Analysis for EUR/USD
Key Resistance and Support
The EUR/USD pair faltered after failing to break through its 1.0600 resistance level earlier this week. Technical indicators such as the 20-day Exponential Moving Average (EMA) suggest a potential retest of this level, but a broader bearish outlook remains intact.
The key downside support for the Euro lies at 1.0330, last tested on November 22. On the upside, the 50-day EMA around 1.0750 serves as a significant resistance point for Euro bulls to overcome.
RSI Indicator Shows Mixed Momentum
Meanwhile, the 14-day Relative Strength Index (RSI) has rebounded above 40.00, signaling that bearish momentum may be losing steam. However, the absence of a stronger upward trend keeps traders cautious, as selling pressure could return quickly.
Road Ahead for the EUR/USD
The EUR/USD pair’s near-term direction will likely hinge on a variety of factors. Flash Eurozone HICP data due Friday will either confirm or dispel current speculation around ECB rate cuts. A sharper-than-expected inflation increase could pare back expectations for aggressive policy changes, potentially supporting the Euro.
Simultaneously, the Fed’s December meeting looms large for the Dollar. If US rate cut expectations remain firm or are realized, the Dollar’s short-term gains may evaporate.
Finally, the geopolitical landscape—including the ripple effects of potential US tariffs on Europe—adds an additional layer of uncertainty to currency performance. While Lagarde’s optimism points to negotiations, concerns about weakening Eurozone exports remain valid.
Final Thoughts
The EUR/USD pair continues to grapple with challenges on both sides of the Atlantic. While German inflation data and dovish ECB speculation weigh on the Euro, the Dollar’s movements remain tied to tempered Fed expectations and subdued market activity during the Thanksgiving period.
Navigating these dynamics, traders are advised to keep a close watch on upcoming inflation reports and central bank meetings. Adept timing and risk management will be key for those looking to capitalize on the EUR/USD’s ongoing fluctuations in the volatile weeks ahead.