Euro Vulnerable as US Yields Stabilize, ECB Dovishness Eyed
The Euro (EUR) weakened against the US dollar (USD) on Wednesday, surrendering early gains fueled by softer-than-expected US inflation data. The pair's inability to sustain upward momentum reflects a confluence of factors, including stabilizing US Treasury yields, growing doubts about the extent of future Federal Reserve rate cuts, and rising concerns about a more dovish European Central Bank (ECB). Technical indicators suggest further downside potential for EUR/USD, with key support levels in sight.
Technical Outlook
- Price Action: EUR/USD opened near 1.0500 in New York, after reaching an overnight high of 1.0539 on EBS. The pair initially rallied as US Treasury yields and the dollar retreated in response to the November Consumer Price Index (CPI) report, which showed a smaller-than-anticipated increase in inflation. However, this upward momentum proved fleeting. Sellers emerged as the dollar's weakness abated and USD/CNH, a proxy for broader risk sentiment, rallied towards 7.2800. EUR/USD subsequently retreated, hitting a low of 1.04803 before finding some support on the back of a broader risk-on mood, with rallies in gold and equity markets helping to limit dollar buying. Despite this late recovery, EUR/USD still closed the session lower, down -0.29% near 1.0480. This price action highlights the pair's vulnerability and the presence of strong selling pressure at higher levels.
- Momentum Indicators: The Relative Strength Index (RSI), a momentum oscillator, is trending lower, indicating waning bullish momentum. This suggests that the recent upward price action lacked conviction and that the bears are regaining control. Furthermore, EUR/USD remains below both its 5- and 21-day moving averages (DMAs), reinforcing the bearish bias. These moving averages now act as dynamic resistance levels, making it difficult for the pair to sustain any meaningful rallies.
- Support and Resistance: Immediate support for EUR/USD is seen at 1.0450, a level that has previously acted as both support and resistance. A break below this level could trigger a further decline towards the psychologically significant 1.0400 handle. Failure to hold above 1.0400 could open the door for a more substantial move towards parity. On the upside, resistance is now at 1.0540, the overnight high. The 21-DMA, currently near 1.0580, represents a further barrier to any sustained upward move.
Fundamental Drivers
- US Monetary Policy Outlook: While market participants had been pricing in a near 100% chance of a Fed rate cut at next week's Federal Open Market Committee (FOMC) meeting, the post-CPI rally in Fed Funds futures stalled below key short-term resistance. This suggests that the market may be reassessing the extent of future monetary easing. With rates markets currently discounting nearly 100 basis points of Fed cuts in 2025, the reluctance to aggressively price in further easing may reflect growing doubts about the Fed's willingness to continue cutting rates aggressively, especially with concerns that the incoming US administration's focus on tariffs and deregulation could lead to higher inflation. This shift in expectations is contributing to the dollar's resilience and weighing on EUR/USD.
- Eurozone Growth Concerns: Investors are increasingly concerned about the health of the Eurozone economy. Dismal growth prospects raise the risk that the ECB will adopt a more dovish tone than anticipated at its upcoming meeting. ECB staff projections, due Thursday, will be closely scrutinized, with growth forecasts attracting particular attention. Any downward revisions to growth projections could weigh on euro zone interest rates, as investors price in more aggressive easing by the end of next year. Currently, the market is pricing in roughly 150 basis points of ECB rate cuts. A more dovish ECB stance would likely widen the interest rate differential between the US and the Eurozone, further supporting the dollar and pressuring EUR/USD.
Outlook
The technical and fundamental backdrop for EUR/USD remains bearish. Unless the pair can reclaim key resistance levels and overcome the prevailing negative sentiment, further downside is likely. Traders should closely monitor upcoming data releases, including US weekly jobless claims and November PPI on Thursday, as well as the ECB's monetary policy decision and economic projections. A break below 1.0450 could trigger a sharper decline towards parity.
