- The EUR/USD pair is moving in a narrow range around 1.0400, with trading volume thin due to the holiday week.
- ECB President Lagarde said she was confident that inflation would sustainably return to the central bank's 2% target sooner than previously thought.
- According to UBS, the Fed plans to cut interest rates twice next year, in June and September.
In Tuesday's European session, EUR/USD remained in a narrow range around 1.0400. The foreign exchange market is closed on Wednesday and Thursday for Christmas and Boxing Day, respectively, so trading volumes are low and the price movements of currency pairs remain slow.
The overall outlook for major currency pairs is bearish. After European Central Bank (ECB) President Christine Lagarde said in an interview with the Financial Times (FT) that the central bank was “very close” to declaring that inflation had reached a sustained moderate level. , the euro (EUR) fell slightly on Monday. The period target is 2%.
However, Christine Lagarde also warned that the central bank must remain vigilant against inflation in the services sector. Inflation across the euro area has fallen to 2.2%, but services inflation remains high at 3.9%.
Asked for her views on how the European Union should deal with tariffs from President-elect Donald Trump, Lagarde said: “I think overall trade restrictions will be followed by retaliation, so retaliation is bad. It was an approach.” A retaliatory, confrontational way of dealing with trade is just bad for the global economy as a whole. ”
The ECB maintains its dovish outlook for 2025, despite firm expectations that eurozone inflation will return to the ECB's 2% target. Traders expect the ECB to cut deposit facility rates by 25 basis points (bp) at each of its next four policy meetings.
Daily Digest Market Trends: EUR/USD follows USD flattening
- EUR/USD has remained flat, following the footsteps of the US dollar (USD) during European trading hours. The US Dollar Index (DXY), which tracks the value of the US dollar against six major currencies, is trading in a narrow range above key support at 108.00 amid light trading volume. The broader outlook for the U.S. dollar remains solid as the Federal Reserve steers the Fed toward tapering interest rate cuts into 2025.
- The latest dotplot shows the Fed has signaled only two rate cuts in 2025, compared to the four expected in September. UBS analysts say the Fed plans to cut interest rates twice by 25 basis points at its June and September policy meetings.
- The latest comments from Fed officials come as the Fed cites stubborn inflation, better-than-previously expected labor market conditions, and uncertainty about how President-elect Donald Trump's next policies will affect the global economy. indicates a shift to a more cautious approach to rate cuts. economy.
- Investors will now focus on the number of new U.S. jobless claims for the week ending Dec. 20, which will be released on Thursday. Investors will be paying close attention to the data as the US economic calendar is light. Economists estimate that 218,000 people have applied for unemployment benefits for the first time, lower than the 220,000 previously reported.
Technical analysis: EUR/USD consolidates around 1.0400
EUR/USD was hovering around 1.0400 on Tuesday, above its two-year low of 1.0330. However, the outlook for major currency pairs remains very bearish as all short- to long-term exponential moving averages (EMAs) are declining.
The 14-day Relative Strength Index (RSI) is hovering in a bearish range of 20.00 to 40.00, indicating downward momentum.
On the downside, the asset could fall below the two-year low of 1.0330 before falling to round-level support around 1.0200. On the contrary, the 20-day EMA near 1.0500 will be a key barrier for euro bulls.
Euro Frequently Asked Questions
The euro is the currency of the 19 European Union countries that belong to the euro area. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of over $2.2 trillion. EUR/USD is the most frequently traded currency pair in the world, accounting for an estimated 30% of all trades, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%). ) and so on.
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank of the euro area. The ECB sets interest rates and controls monetary policy. The ECB's main task is to maintain price stability, which means controlling inflation or stimulating growth. The main means is to raise or lower interest rates. Relatively high interest rates, or expectations of rising interest rates, usually benefit the euro, and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation rises more than expected, especially above the ECB's 2% target, the ECB will mandate interest rate hikes to rein in inflation. Relatively high interest rates compared to other countries typically benefit the euro, as it makes the region more attractive to global investors as a place to park their funds.
The data release will gauge the health of the economy and could have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the euro. This could not only attract more foreign investment but also prompt the ECB to raise interest rates, which could directly lead to a stronger euro. Otherwise, if economic indicators are weak, the euro is likely to weaken. Economic data for the euro area's four largest economies (Germany, France, Italy and Spain) is particularly important, as they account for 75% of the euro area economy.
Another important data regarding the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, the value of its currency increases purely due to the additional demand generated from foreign buyers seeking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
