In the North American trading session on Friday, the EUR/USD found some temporary stability around 1.0220. This came after hitting its lowest point in over two years on Thursday. Experts in the market anticipate further drops for this major currency pair, possibly driving it down to parity, largely due to differing monetary policy expectations between the Federal Reserve (Fed) and the European Central Bank (ECB).
On the U.S. side, Fed officials have scaled back projections for interest rate cuts in 2025, whereas in Europe, the ECB continues to ease its policy at a steady rate. The Fed’s latest Summary of Economic Projections suggests interest rates will settle around 3.9% by the end of the year—anticipating two cuts, contradicting earlier forecasts of four.
Investors have also pared down their bets on a more dovish Fed stance, influenced by expected growth from President-elect Donald Trump’s policies. These include stricter immigration controls, increased import tariffs, and tax cuts, all seen as factors that could enhance growth and stoke inflation in the U.S.
The U.S. Dollar Index (DXY), which measures the dollar’s strength against six key currencies, dipped slightly on Friday yet remains near its two-year high above 109.00.
Looking ahead, all eyes are on various U.S. labor market stats, which will shape expectations for Fed interest rates. At the moment, the Fed is predicted to maintain a steady rate of 4.25%-4.50% at its January meeting. Furthermore, Friday will see the release of the U.S. ISM Manufacturing Purchasing Managers Index for December at 15:00 GMT, with forecasts suggesting it will remain at 48.4—implying ongoing contraction in manufacturing.
As the week unfolds, traders are focused on preliminary data for Germany and the Eurozone’s Harmonized Index of Consumer Prices (HICP) slated for release on Monday and Tuesday, respectively.
Meanwhile, the EUR/USD is expected to dip below the immediate support level of 1.0220, as the market forecasts suggest a 113 basis point reduction in the ECB’s interest rates for 2025. This would mean at least four cuts of 25 basis points, considering Eurozone inflation risks falling below target. ECB officials seem at ease with this projection. On Thursday, ECB Governing Council member Yannis Stournaras mentioned the central bank’s rates should drop to about 2% by autumn this year, hinting at cuts during the upcoming policy meetings.
The ECB’s dovish stance is also rooted in low inflation and sluggish economic activity, compounded by potential trade tensions with the U.S., as indicated by the HCOB Manufacturing PMI showing a slight contraction for December.
On the technical side, after dipping below 1.0330 on Thursday, EUR/USD remains under selling pressure. The pair’s near-term outlook remains bearish, with the 20-week Exponential Moving Average (EMA) on a downtrend at 1.0620. The 14-week Relative Strength Index (RSI) has fallen near 30.00, signaling strong downward momentum, although an oversold condition may spark a minor rebound. Support could emerge around 1.0100, while resistance is seen at 1.0458.
In summary, the ECB remains focused on maintaining price stability within the Eurozone, using interest rates as a primary tool. In extreme conditions, the ECB can employ quantitative easing—a process that typically leads to a weaker euro. Conversely, an economic recovery may bring about quantitative tightening, aiming to balance out inflation by halting new bond purchases and not reinvesting in maturing bonds, which could prove favorable for the euro.
