The euro is likely to remain under pressure, primarily influenced by external factors for the time being. On the other hand, resilient US economy, cautious Fed messaging, and ongoing inflationary concerns, the dollar is likely to maintain its bullish outlook.

EUR: Remain bearish

The recent data from the Eurozone has provided temporary relief to the bearish pressure on the euro, but this strength has been short-lived. December's headline CPI rose to 2.4% y/y from 2.2%, with core inflation remaining sticky at 2.7%. Additionally, service sector inflation edged up to 4.0% from 3.9%. These figures have reduced the scale of expected ECB rate cuts this year, trimming the anticipated cuts from 107bps to under 100bps. This adjustment could offer some support for the euro as rate cut expectations are pared back, but it is unlikely to prevent a January rate cut, with a 50bps reduction now considered improbable. External factors continue to be the primary drivers of downward pressure on the euro, particularly the policy divergence with the Fed, where the US central bank is expected to slow the pace of its rate cuts. Moreover, geopolitical risks, including potential tariffs from President-elect Trump and the lack of fiscal stimulus from China, are significant headwinds for the euro.

Despite some positive economic surprises, such as December's inflation data and better-than-expected industrial production in Germany, these factors are not enough to counter the broader bearish sentiment surrounding the euro. ING anticipates that EUR/USD will remain fragile, with geopolitical risks, particularly US tariff threats and persistent US rate firmness, undermining any potential euro rebound. Looking ahead, the Eurozone calendar is light, with no major market-moving releases expected. As a result, the euro's movement will continue to be driven by the rate differential between EUR and USD. Unless there is a significant positive domestic development or a reduction in external risks—such as a shift in Trump’s tariff policies, which were briefly reported by the Washington Post as potentially more selective than initially feared, though quickly rejected by Trump—the euro is likely to remain under pressure, primarily influenced by external factors for the time being.

USD: Still the king

The US dollar remains well-supported due to robust economic fundamentals, cautious Federal Reserve commentary on rate cuts, and a strong December Non-Farm Payrolls (NFP) report, which reduced market expectations for 2025 rate easing. The Fed’s December meeting minutes highlighted its readiness to slow the pace of rate cuts, reflecting solid economic momentum and persistent inflation risks. Market expectations now suggest only one rate cut in 2025, with timelines being pushed further into October 2025 following the strong NFP data. Payrolls rose by 256,000 in December, well above expectations, while the unemployment rate fell to 4.1%. These results indicate resilience in the labor market, reducing the urgency for immediate monetary policy easing.

Meanwhile, Fed officials continue to emphasize caution in future rate adjustments. Hawkish members, such as Governor Bowman and President Schmid, underscored inflation concerns and the need for gradual rate cuts, if any, to avoid undermining price stability. Their comments reflect a central bank still focused on inflation as a primary mandate. Meanwhile, dovish voices, including President Goolsbee, noted progress in cooling inflation over recent months but acknowledged its stickiness due to base effects. Together, these factors suggest the Fed is unlikely to rush into aggressive rate cuts, further supporting the USD.

Looking ahead, market attention will focus on the US December CPI data. Persistent inflation would reinforce recent central bank commentary that the Fed should remain cautious and adopt a gradual approach to rate cuts. However, even in the event of cooling inflation, a single data point may not significantly shift market sentiment or alter the current pricing dynamics. Additionally, the near term focus will remain to the incoming Trump administration, where any downward corrections in the USD could present attractive buying opportunities. In summary, supported by a resilient US economy, cautious Fed messaging, and ongoing inflationary concerns, the dollar is likely to maintain its bullish outlook. While gradual monetary easing may occur later in 2025, the immediate trajectory for the USD remains favorable, bolstered by strong economic fundamentals, policy divergence with other major central banks, and the market’s anticipation of potential policy shifts under the new Trump presidency.