EUR/USD Market Overview

EUR/USD experienced a minor decline, hovering just below 1.1730 on Friday after retreating from a two-month peak of 1.1762 seen on Thursday. The rising gap between monetary policies of the European Central Bank (ECB) and the US Federal Reserve (Fed) has provided some underlying support for the currency pair, which has gained nearly 2% over the past three weeks.

This week, the Fed implemented a rate cut and hinted at another cut expected in 2026. However, investors are anticipating at least two more cuts as they consider the dovish stance of Kevin Hassett, who is likely to take over from Chairman Jerome Powell. Hassett, currently serving as the White House economic adviser, has voiced his intentions to advocate for significantly lower borrowing costs.

On the economic front, German inflation data indicated that price pressures surged in November, yet the monthly inflation rate saw a contraction. Meanwhile, U.S. Fed officials are set to speak, offering potential clarity on the central bank’s monetary direction.

Daily Market Movements: Euro’s Decline Limited by Weak US Dollar

• The euro continues to benefit from a broadly weaker US dollar. The USD index, which gauges the dollar’s performance against six major currencies, is trading at a two-month low around 98.00, as investors anticipate further rate cuts from the Fed amidst easing cycles from most central banks.
• Recent German statistics revealed that the Harmonized Index of Consumer Prices (HICP) rose to 2.6% year-on-year in November from 2.3% the previous month, though it fell 0.5% month-to-month. These findings confirm earlier assessments, leading to minimal impact on the euro.
• In the U.S., initial jobless claims surged by 44,000 to reach 236,000 in the first week of December, marking the largest increase in over four years. This trend supports the notion that the Fed might need to further reduce rates to address a weakening labor market.
• Looking ahead, attention will be directed towards comments from Philadelphia Fed President Anna Paulson, Cleveland Fed President Beth Hammack, Chicago Fed President Austan Goolsby, and Kansas City Fed President Jeff Schmidt during U.S. trading hours.

Technical Analysis: EUR/USD Pullback from Overbought Levels

EUR/USD is sliding back after a nearly 1.2% gain over the last couple of days, pushing the technical indicators into overbought territory. The 4-hour Relative Strength Index (RSI) presently sits at 63, having peaked above 70, while the Moving Average Convergence Divergence (MACD) shows flattening, suggesting that bullish momentum is starting to fade.

The bears are currently testing support around the October 17 high of 1.1730. In the near term, traders will be eyeing the low of 1.1680 from Thursday and the December 9 low near 1.1615 for further direction. On the upside, resistance levels may emerge around Thursday’s high of 1.1762 and the October 1 peak near 1.1780, with additional targets identified at the September 23 and 24 highs near 1.1820.

US Dollar Frequently Asked Questions

The United States Dollar (USD) serves as the official currency of the United States and is widely used internationally, functioning alongside local currencies. It remains the most traded currency globally, making up over 88% of foreign currency trading volume, which averages about $6.6 trillion daily based on 2022 figures. Post-World War II, the USD overtook the British pound as the planet’s reserve currency, transitioning from being gold-backed until the gold standard was abandoned in 1971.

Monetary policy established by the Federal Reserve System (Fed) primarily influences the USD’s value. The Fed’s two main objectives are to ensure price stability (controlling inflation) and to promote full employment, primarily leveraging interest rate adjustments to meet these aims. If inflation outpaces the 2% target, the Fed may increase rates, whereas cuts could occur if inflation dips below this figure or unemployment rises.

In extreme situations, the Fed might resort to printing more currency, adopting quantitative easing (QE) to enhance credit flow in a stalled financial context. QE is a non-standard measure usually employed when traditional rate cuts fail to stimulate desired results, seen notably during the 2008 financial crisis.

Conversely, quantitative tightening (QT) refers to the Fed ceasing its bond purchases and not reinvesting the principal from maturing bonds, generally resulting in a favorable environment for the USD.