By Areena FxEUR/USD fell below the psychological 1.0500 level during Monday’s European session, reversing earlier gains as dovish signals from European Central Bank (ECB) officials fueled expectations of further interest rate cuts. ECB President Christine Lagarde emphasized the potential for additional easing, stating that further rate cuts would depend on confirmation of disinflation trends. ECB Vice President Luis de Guindos echoed this sentiment, reinforcing the central bank’s focus on easing policy to address growing economic risks.
ECB Policy Outlook:
- The ECB recently lowered the Deposit Facility Rate by 25 basis points (bps) to 3%, completing 100 bps in cuts this year.
- Market expectations point to another 100 bps reduction in key rates by June 2025 as inflation pressures ease.
- Lagarde highlighted declining inflation in the services sector as a key factor behind the dovish policy outlook.
Eurozone PMI Data:
Eurozone business activity showed signs of improvement in December:
- Composite PMI: Increased to 49.5 from 48.3, signaling slower contraction.
- Services PMI: Surged to 51.4, returning to expansion territory after November’s decline (49.5).
- Manufacturing PMI: Continued contraction but steadied at 45.2, slightly better than estimates (45.0).
Germany and France also reported better-than-expected Composite PMIs, driven by a rebound in services. However, both indices remained below the 50.0 threshold, indicating overall economic contraction.
Political Developments:
In France, President Emmanuel Macron appointed François Bayrou as Prime Minister after Michel Barnier lost a no-confidence vote. Bayrou faces significant challenges, including managing political divisions and addressing fiscal concerns amid proposed tax hikes worth €60 billion.
Market Movers: US Dollar Rebounds Ahead of Fed Decision
EUR/USD’s pullback coincides with a recovery in the US Dollar Index (DXY), which climbed near the key resistance level of 107.00. Traders are bracing for volatility ahead of the Federal Reserve’s interest rate decision and updated economic projections.
Fed Outlook:
- The Fed is expected to cut its benchmark rate by 25 bps to a range of 4.25%-4.50%.
- Focus will be on the Fed’s “dot plot,” providing insights into policymakers’ expectations for rate changes in 2025.
- Economists anticipate three Fed rate cuts next year, although concerns over upside inflation risks persist.
Technical Analysis: EUR/USD Struggles Around 1.0500
EUR/USD remains under pressure near 1.0500:
- Resistance: The pair faces strong resistance at 1.0535, aligning with the 20-day Exponential Moving Average (1.0545).
- Support: Key downside level lies at the two-year low of 1.0330.
- Momentum: The 14-day Relative Strength Index (RSI) hovers around 40.00. A drop below 40.00 could signal further bearish momentum.
Key Events to Watch:
- Fed Decision (Wednesday): Clues on the future rate path from the dot plot and economic projections.
- US December PMI (Monday, 14:45 GMT): Market sentiment will react to any surprises in manufacturing and services performance.
With dovish ECB expectations and uncertainty around the Fed’s policy trajectory, EUR/USD remains vulnerable to downside pressure.