FX Daily: Trive Bearish on EUR/USD
The euro is expected to remain under pressure in the near term, driven by ECB easing measures, geopolitical risks, and economic divergences. Conversely, a hawkish FOMC stance and the potential impact of Trump’s policies continue to support a strong USD.
EUR: Remain under pressures
The euro faces ongoing challenges, with several factors aligning to weigh on its performance. Recent softness in the euro began with weaker economic data, prompting sequential ECB rate cuts and raising concerns about political stability in key economies like France and Germany. Additionally, looming trade tensions with the US are amplifying downside risks. The market is already pricing in multiple ECB rate cuts for 2025, though the extent of these will depend on upcoming political developments, inflation trends, and growth dynamics.
Next week’s European inflation data will be a key focus. While expectations are for a slight increase in inflation that could provide marginal support to the euro, the broader backdrop of extended ECB easing expectations and weak PMI data suggests limited upside. The possibility of further policy divergence between the US and the eurozone, driven by a hawkish Federal Reserve and US economic strength, could continue to pressure the euro.
EUR/USD has already dropped significantly—nearly 9% since late September—indicating that much of the negative sentiment around incoming US policies may already be reflected in the exchange rate. However, the lack of a year-end rally or short-covering in euro positions signals that bearish momentum remains intact. Trade tariffs expected to be announced by President Trump on China, Mexico, Canada, and potentially Vietnam are likely to further reinforce this trend, especially as these measures can be implemented without congressional approval. The potential for tax policy changes in the US could also exacerbate the economic divergence, favoring continued dollar strength.
Other external pressures, such as the rise in TTF gas prices linked to Ukraine’s pipeline shutdown, add to the euro’s vulnerabilities. Elevated energy costs increase economic strain in the eurozone, undermining confidence in the region’s growth outlook. Despite occasional technical rebounds, the euro remains unattractive in the longer term, with another leg lower—potentially toward the 1.0200 mark—remaining plausible before any meaningful recovery.
In summary, the euro is likely to remain under pressure in the near term, weighed down by ECB easing, geopolitical risks, and external economic divergences. While inflation data and other catalysts could provide temporary support, broader dynamics favor continued weakness against the US dollar and possibly other major currencies.
USD: New year, old drivers
The narrative of strong US dollar remains supported by a combination of favorable seasonality, resilient economic data, and policy dynamics. Historically, the dollar exhibits strength in January and February, a trend likely to persist unless key narratives shift. Recent data, such as the ISM Manufacturing PMI, exceeded expectations, signaling improving economic momentum. Notably, new orders and production returned to expansionary territory, although employment in manufacturing weakened, highlighting uneven sectoral performance.
Monetary policy continues to favor dollar strength, with the Federal Reserve adopting a cautious stance on rate cuts. While markets anticipate modest easing in 2025, the Fed’s projections indicate a slower pace of reductions, emphasizing concerns over potential inflation risks and a robust labor market. In contrast, other major central banks are expected to maintain dovish policies, widening the policy divergence and further bolstering the dollar.
Fiscal policies and geopolitical developments also play a role. Plans for heightened tariffs and tightened border controls may drive inflationary pressures, reinforcing the Fed’s restrictive stance. Meanwhile, manufacturing sectors face uncertainties around trade, likely constraining activity in the short term. Despite this, steady employment levels and strong asset values suggest resilient consumer spending, a key pillar of economic stability.
Looking ahead, the upcoming week will be pivotal for the USD, with markets focusing on a wide range of U.S. economic data, including the S&P Global Services PMI, ISM Non-Manufacturing PMI, JOLTS, FOMC Meeting Minutes, the NFP report, and several Fed speeches. Among these, the meeting minutes and the NFP report are expected to take center stage. The minutes are likely to echo the cautious tone of the December meeting, reflecting the FOMC's prudent stance on rate cuts.
As for the NFP, unless there is a significant downside surprise, the data is expected to reinforce the narrative of a resilient labor market, with risks to the labor market outlook appearing balanced. Even in the event of a mild downside surprise, it is unlikely to shift the Fed’s position, which favors holding rates steady at the January meeting as the larger uncertainty on the horizon of the return of heightened tariffs, tightened border controls, and tax cuts under Trump on January 20. These factors could pose challenges for the Fed in pursuing rate reductions in 2025. Currently, market pricing indicates an 90% probability that the Fed will maintain rates at the January meeting, reflecting the prevailing cautious sentiment amid looming policy and economic uncertainties.
EUR/USD 4H Chart
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