EUR/USD edged higher to around 1.0515 ahead of Eurozone and US flash PMI data for December.
The ECB is expected to cut rates by a further 100 basis points next year.
Investors will be watching the Fed’s dot plot closely for new US rate forecasts.
EUR/USD edged higher to around 1.0515 in European trading on Monday ahead of HCOB’s release of Eurozone transatlantic flash PMIs for December. The PMI reports are expected to highlight the divergence between the Eurozone and US economies, with analysts expecting overall business activity in the Eurozone to contract faster due to lower manufacturing and services output, while the US will continue to expand. This situation supports further rate cuts by the European Central Bank (ECB) and puts pressure on the Euro (EUR).
The ECB cut its deposit facility rate by 25 basis points to 3% last Thursday, bringing the total rate cuts this year to 100 basis points. With eurozone inflation under control and officials concerned about growing economic risks, market participants expect the ECB to achieve another 100 basis point cut in its key lending rate by June 2025.
On Friday, a significant number of ECB policymakers supported further easing and a gradual move toward a neutral rate, which they expect to be around 2%. "There will be further rate cuts next year," Bank of France Governor Francois Villeroy de Garhout told French radio station BFM Business. "I noticed that collectively we are quite comfortable with the interest rate forecasts of financial markets for next year," he said when asked about the rate forecast.
For more guidance on interest rates, ECB President Christine Lagarde will deliver a keynote speech and participate in a panel discussion at a Lithuanian banking industry event on Europe's economic and political resilience.
On the political front, French President Emmanuel Macron named Francois Baillou as the new prime minister on Friday. He succeeds Michel Barnier, who lost a no-confidence vote after failing to pass a budget that included a 60 billion euro rate hike to cut the fiscal deficit. Baillou is expected to face similar challenges in office and will meet with far-right and left-wing leaders on Monday and Tuesday, according to Reuters.
A slight decline in the U.S. dollar (USD) has driven a modest upside for the EUR/USD pair amid uncertainty ahead of the Federal Reserve (Fed) rate decision due on Wednesday. The U.S. Dollar Index (DXY), which tracks the value of the greenback against six major currencies, was lower but trading near the key resistance level of 107.00. The Fed is widely expected to cut its key lending rate by 25 basis points to 4.25%-4.50%. As such, investors will be keeping a close eye on the Fed’s Summary of Economic Projections or the so-called “dot plot”, which shows where policymakers think the federal funds rate is headed in the medium to long term. Most economists expect the Fed’s outlook for 2025 to be less dovish, according to a Bloomberg survey conducted between December 6 and 11. Economists see the Fed cutting rates three times next year, assuming progress in the deflationary process has slowed. The survey also showed that economists’ concerns about upside risks to inflation have outweighed downside risks to employment due to the policies of US President-elect Donald Trump, including mass deportations, new tariffs and tax cuts. Intraday on Monday, investors will focus on the United States (US) December S&P Global Purchasing Managers Index report, which will be released at 14:45 GMT.
EUR/USD is trading above the psychological figure of 1.0500, but continues to struggle around the three-day resistance of 1.0535. The major currency pair remains below the 20-day exponential moving average (EMA) around 1.0545, suggesting a bearish near-term trend.
The 14-day relative strength index (RSI) is hovering around 40.00. Bearish momentum should be triggered if the RSI (14) falls below 40.00.
Looking downside, the two-year low of 1.0330 will provide key support. Conversely, the 20-day exponential moving average will be a key hurdle for the euro to rise.
The euro is the currency of the 20 European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. According to the Bank for International Settlements, in 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of more than $2.2 trillion. EUR/USD is the most traded currency pair in the world, accounting for about 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank, located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB's main task is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is to raise or lower interest rates. Relatively high interest rates - or the expectation of higher interest rates - are generally good for the euro, and vice versa. The ECB's Governing Council meets eight times a year to make monetary policy decisions. Decisions are made by the presidents of the eurozone's national banks and the six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, measured as the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation is higher than expected, especially above the ECB's 2% target, the ECB has to raise interest rates to control inflation. Relatively high interest rates compared to other countries are generally good for the euro because it makes the region more attractive as a place for global investors to invest.
The data released can measure the health of the economy and can have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can all influence the direction of the euro. A strong economy is good for the euro. Not only will this attract more foreign investment, it may also encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the euro may fall. Economic data from the four largest economies in the eurozone (Germany, France, Italy and Spain) is particularly important because they account for 75% of the eurozone economy.
Another important statistic for the euro is the trade balance. This indicator measures the difference between a country's export revenue and import expenditure over a certain period of time. If a country produces popular exports, then its currency will gain value purely from the additional demand created by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance will strengthen the currency, and vice versa.