The EUR is bearish due to weak data and ECB dovishness, while the USD is bullish, driven by strong fundamentals and resilient economic data as well as potential labor market recovery.

EUR: Under pressures and politic uncertain

The EUR maintains a bearish outlook driven by persistent economic, political, and external challenges. Recent eurozone data highlights significant economic weakness, with November PMI surveys falling sharply in major economies—France (44.8), Germany (47.3), and the broader eurozone (50.7). While these readings suggest potential contraction, there remains some optimism as earlier PMIs underestimated growth in Q3, which recorded its strongest expansion since Q3 2022 at 0.4% q/q. However, signs of stagnation persist, as reflected in Germany’s latest ifo index, which dropped to 85.7, signaling declining business sentiment amid weak industrial orders, consumption, and geopolitical uncertainties.

The ECB’s dovish stance further weighs on the EUR. Markets are pricing in a 30bps rate cut for December, following weak PMIs and subdued growth expectations. ECB officials remain cautious about delivering a larger 50bps cut, with Schnabel highlighting limited room for further easing as rates approach neutral territory (2.00%-3.00%). In contrast, Villeroy supports deeper cuts below neutral levels, but a significant move may be delayed until early next year when clarity on Trump’s tariff policies emerges. Political instability in France and potential austerity measures in Germany add further pressure, undermining investor confidence in the EUR.

Externally, the EUR faces risks from US fiscal expansion and potential trade tensions under the Trump administration. While the euro initially found relief from being excluded from recent US tariff targets, concerns persist that EU trade surpluses may come under scrutiny in 2024. Longer-term prospects could improve if geopolitical tensions, such as the Russia-Ukraine conflict, de-escalate, boosting eurozone domestic demand. However, near-term sentiment remains bearish, with HSBC forecasting EUR/USD to decline below parity in 2025, driven by growth divergence favoring the US and eurozone austerity measures under the Stability and Growth Pact.

In conclusion, the EUR remains under pressure from weak economic fundamentals, ECB rate cuts, political instability, and external risks. Barring unexpected shifts in geopolitical dynamics or stronger eurozone data, the EUR/USD is likely to remain subdued, consolidating near current levels and following broader USD trends in near term.

USD: Still the king

The baseline of USD remain supported in the near term, as driven by favorable economic fundamentals, policy expectations, and anticipated market data. Political developments, such as the nomination of Scott Bessent as Treasury Secretary, have mitigated concerns about aggressive trade policies under Trump’s administration. Bessent’s “Three 3s” policy—focused on reducing the budget deficit, boosting GDP growth through deregulation, and increasing oil production—supports a stable and growth-oriented approach, which has strengthened market confidence. Meanwhile, Trump's recent tariff threats against Canada and Mexico appear tied to non-economic issues like drug enforcement and migration, making them less impactful on the USD.

Aside politic, the economic data continues to underpin the dollar. The October PCE report confirmed stable inflationary pressures, with core inflation rising 0.3% m/m and 2.8% y/y, up from 2.7% in September. This reinforces expectations that the Federal Reserve remains data-dependent, with markets pricing a 58% chance of a 25bps rate cut in December. The FOMC minutes highlighted balanced risks between inflation and employment, with some members advocating for maintaining restrictive rates and others signaling readiness to ease if labor market conditions or growth weaken.

Looking ahead, market focus will shift to PMIs data and the November Non-Farm Payrolls (NFP) report. Early PMI releases suggest that the U.S. economy remains resilient, and any positive surprises could provide further support for the USD. The NFP, however, will be the week's primary market mover, as it could clarify the Fed’s policy direction for December. October's payrolls were impacted by strikes and hurricanes, showing weaker-than-expected figures. ING highlights that November’s report could see a rebound, with a baseline increase of 109k jobs excluding the strike effects, alongside the return of 44k striking workers and an estimated 65k previously uncounted due to hurricane disruptions. A robust November payroll figure would bolster USD strength, solidifying the case for a Fed pause. Overall, the combination of robust fundamentals, steady inflation data, and potential for stronger labor data reinforce a bullish near-term outlook.

EUR/USD 4H Chart