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17 Jan 2025
EUR/USD trades cautiously as focus shifts to Trump’s return to White House
- EUR/USD wobbles around 1.0300 as investors shift focus to the US President-elect Donald Trump’s inauguration ceremony.
- Trump is expected to release policies on raising tariffs and lowering taxes soon after re-joining the White House.
- The ECB minutes showed that officials debated over reducing the Deposit Facility rate by 50 bps in December.
EUR/USD trades with caution in a narrow range near the key level of 1.0300 in Friday’s European session. The major currency pair oscillates inside Thursday’s trading range, with investors focusing on United States (US) President-elect Donald Trump’s inauguration on Monday.
Investors await Trump’s announcement of new economic policies for fresh cues about the United States (US) economic outlook and the likely global trade environment. Market experts believe that Trump’s policies will boost inflation and economic growth and lead to a global trade war.
While testifying at a Senate Finance Committee on Wednesday, Trump’s treasury pick, Scott Bessent, said there is an urgent need to conclude the current tax regime to avoid the burden of a $4 trillion tax on the middle class. "If we do not renew and extend, then we will be facing an economic calamity,” Bessent said. He also supported Trump’s protectionist policies as they would help combat unfair trade practices and increase the US’s negotiating power.
Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks higher and holds the key support of 109.00. The US Dollar remains broadly firm even though traders started pricing in at least one interest rate cut by the Federal Reserve (Fed) this year. Traders have raised Fed dovish bets as the core Consumer Price Index (CPI) – which excludes volatile food and energy prices – decelerated to 3.2% in December, the lowest level in over four years.
Daily digest market movers: EUR/USD faces pressure due to ECB dovish bets
- EUR/USD stays under pressure as the Euro’s (EUR) outlook remains weak amid firm European Central Bank (ECB) dovish bets. Traders are pricing in a 25 basis points (bps) interest rate cut by the ECB in each of the following four policy meetings amid growing concerns over the Eurozone economic outlook and price pressures remaining under control.
- ECB officials are also comfortable with more interest rate cuts. The ECB minutes of the December meeting showed on Thursday that policymakers discussed the pace of policy-easing this year more than pausing or continuing the interest rate cut cycle. The minutes also showed that officials heavily debated announcing a larger-than-usual interest rate cut of 50 bps to provide insurance against the downside risks to growth, which are exacerbated by global and domestic political uncertainties. However, the ECB cut interest rates by 25 bps.
- There was a clear shift of communication from the “return of inflation to ECB’s target of 2%” to “keeping inflation sustainably at their target”. The ECB minutes also showed that officials were worried about growing risks to inflation undershooting the central bank’s target of 2%.
- Meanwhile, worries about the EUR/USD pair falling to parity have accelerated as Trump’s return to the White House is on the horizon. Trump is expected to decide to push import tariffs higher soon, a scenario that will be unfavorable for the European Union (EU) export sector.
Technical Analysis: EUR/USD consolidates around 1.0300
EUR/USD stays sideways near 1.0300 on Friday after gaining ground from the over-two-year low of 1.0175 reached on Monday. The major currency pair bounces back on divergence in momentum and price action. The 14-day Relative Strength Index (RSI) formed a higher low near 35.00, while the pair made lower lows.
However, the outlook of the shared currency pair is still bearish as all short-to-long-term Exponential Moving Averages (EMAs) are sloping downwards.
Looking down, Monday’s low of 1.0175 will be the key support zone for the pair. Conversely, the January 6 high of 1.0437 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can 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. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.