EUR/USD trades sideways as cooling Eurozone inflation keeps downside bias afloat

• EUR/USD is stuck in a tight range around 1.0400 amid thin trading volumes in a holiday-truncated week.
• ECB Lagarde said she is confident about inflation sustainably returning to the bank’s target of 2% sooner than previously thought.
• According to UBS, the Fed will deliver two interest rate cuts next year, in June and September. 

EUR/USD consolidates in a tight range around 1.0400 in Tuesday’s European session. Thin trading volume due to holidays in Forex markets on Wednesday and Thursday on account of Christmas Day and Boxing Day, respectively, has kept the pair’s price action muted.

The overall outlook of the major currency pair is bearish. The Euro (EUR) weakened slightly on Monday after European Central Bank (ECB) President Christine Lagarde told the Financial Times (FT) in an interview that the central bank is “very close” to declaring that inflation has been brought sustainably to its medium-term target of 2%.

However, Christine Lagarde also warned that the central bank should remain vigilant to inflation in the services sector. While headline Eurozone inflation has eased to 2.2%, service inflation is still high at 3.9%.

When asked about her views on how the European Union (EU) should address incoming tariffs from United States (US) President-elect Donald Trump, Lagarde said that "retaliation was a bad approach because I think that overall trade restrictions followed by retaliation and this tit-for-tat, conflictual way of dealing with trade is just bad for the global economy at large”.

ECB dovish bets for 2025 stay afloat amid firm expectations that Eurozone inflation will return to the bank’s target of 2%. Traders expect the ECB to cut its Deposit Facility rate by 25 basis points (bps) in each of the next four policy meetings.

Daily digest market movers: EUR/USD follows sideways US Dollar

• EUR/USD stays sideways, following the footprints of the US Dollar (USD) in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, oscillates in a tight range above the key support of 108.00 amid thin trading volume. The broader outlook for the USD remains firm as the Federal Reserve (Fed) has guided fewer interest rate cuts for 2025.
• In the latest dot plot, the Fed signaled only two interest rate cuts in 2025 compared to the four cuts projected in September. According to analysts at UBS, the Fed will deliver two 25-bps interest rate cuts in the June and September policy meetings.
• Latest commentaries by Fed officials have shown that they have moved to a more measured approach to interest rate cuts due to stubborn inflation, better labor market conditions than previously anticipated, and the uncertainty over the impact of incoming policies by President-elect Donald Trump on the economy.
• Going forward, investors will focus on the US Initial Jobless Claims data for the week ending December 20, which will be published on Thursday. Due to a light US economic calendar, investors will pay close attention to the data. Economists estimate that the number of individuals claiming jobless benefits for the first time was at 218K, lower than the previous release of 220K.

Technical Analysis: EUR/USD consolidates around 1.0400

EUR/USD juggles around 1.0400 on Tuesday, holding above the two-year low of 1.0330. However, the outlook for the major currency pair remains strongly bearish as all short-to-long-term Exponential Moving Averages (EMAs) are declining. 

The 14-day Relative Strength Index (RSI) oscillates in the bearish range of 20.00-40.00, indicating a downside momentum.

Looking down, the asset could decline to near the round-level support of 1.0200 after breaking below the two-year low of 1.0330. Conversely, the 20-day EMA near 1.0500 will be the key barrier for the Euro bulls.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.