Written by: Rania Gule, Senior Market Analyst at XS.com
The EUR/USD pair maintains key support at the 1.0340 level today, Friday, reflecting a degree of temporary stability amid the multiple challenges facing the euro. In my opinion, while this support somewhat boosts investor confidence, the broader picture for the pair remains influenced by the hawkish stance of the U.S. Federal Reserve. The U.S. monetary policy, driven by expectations of continued tightening due to strong economic growth, imposes long-term pressure on the pair, limiting any near-term recovery for the euro.
Investors are now looking to U.S. Personal Consumption Expenditures (PCE) inflation data for new guidance on the trajectory of interest rates in the U.S. With expectations for the annual core inflation to accelerate to 2.9% in November, it is anticipated that the Federal Reserve will continue to act cautiously regarding future rate cuts. This caution, in my view, reflects the strength of the U.S. economy, as emphasized by Federal Reserve Chair Jerome Powell. Positive economic indicators provide the central bank with room to adapt to market needs without risking economic stability. Consequently, any additional positive data could further strengthen the dollar, increasing pressure on the EUR/USD pair.
The U.S. dollar demonstrates notable strength across the board, supported by several factors, most notably strong economic performance and expectations of a hawkish monetary policy. The U.S. Dollar Index (DXY), which measures the greenback’s performance against a basket of major currencies, has stabilized near its two-year highs. Despite some recent slight declines, the dollar retains its appeal as a safe-haven currency, reducing the likelihood of sustained euro gains. Although economic data from the eurozone might provide some support for the euro, it appears insufficient to counter the dollar’s ongoing momentum.
On the other hand, the European Central Bank (ECB) exhibits a somewhat contrasting monetary policy approach compared to the Federal Reserve. ECB Governor Christodoulos Patsalideshas emphasized his opposition to further rate cuts, stressing the need for gradual monetary easing. This stance reflects growing concern about persistent inflationary pressures in the eurozone, which limits the ECB’s flexibility to take bolder steps to support economic growth. However, this gradual approach may reduce the euro’s appeal against the dollar, which benefits from a clearer U.S. monetary policy outlook.
Regarding European economic data, I believe Germany’s tax policy reforms could be a supportive factor for the euro in the near term. The expected annual tax reductions of approximately €14 billion are likely to enhance German households’ purchasing power, boosting domestic demand and stimulating economic growth. However, the impact of these measures seems limited compared to the broader challenges facing the eurozone, such as slowing economic growth and ongoing uncertainty surrounding inflation.
In recent EUR/USD trading, which has shown a slight recovery, the pair remains cautious near its annual lows at 1.0350. This behaviour, in my view, reflects hesitation among investors closely monitoring global economic and political developments. With expectations for further ECB rate cuts potentially extending into 2025, the euro’s bearish momentum may persist unless strong signs of economic recovery emerge in the region.
In the U.S., recent economic data, such as the revision of Q3 GDP growth to 3.1%, adds further support for the dollar. This growth, in my opinion, strengthens the Federal Reserve’s ability to implement its hawkish monetary policies without negatively impacting the domestic economy, increasing the dollar’s attractiveness as an investment option. The November PCE price index data will likely be crucial in determining the dollar’s near-term direction. If the figures meet or exceed expectations, we may see continued dollar strength at the expense of other currencies.
Based on the above, I believe the EUR/USD pair faces significant challenges in maintaining any sustained gains. On the one hand, the euro suffers from relative weakness against the strong dollar, bolstered by economic and political factors that enhance the U.S. currency’s appeal. On the other hand, the eurozone lacks the economic momentum necessary to effectively support the euro, particularly given the ECB’s cautious approach.
In conclusion, it seems to me that the overall direction for the EUR/USD pair will remain under downward pressure in the near term, with the dollar holding a position of strength. However, any sudden changes in monetary policy or economic data on either side could lead to significant market volatility. Therefore, caution and vigilance remain the key traits for dealing with this pair shortly.