EUR/USD retreated from weekly highs of 1.0600 on Thursday due to thin liquidity conditions as US markets remain closed for Thanksgiving. The pair edges down 0.10% as traders digested data from the Eurozone (EU).
Dovish ECB comments weigh on EUR/USD; diverging policy favors downside
The EUR/USD fall is mainly driven by Germany’s November inflation figures, which, despite improving, continued to paint a deflationary scenario. The Harmonized Index of Consumer Prices (HICP) improved from -1.58% to -0.7% MoM, as expected by analysts. On an annual basis, the HICP missed 2.6%, rose by 2.4%, and exceeded October’s -1.47% contraction.
Although Bundesbank President and ECB board member Joachim Nagel did not comment on the data, his counterpart at the Bank of France, Francois Villeroy, crossed the wires and was more dovish than expected. He suggests that the ECB should include negative rates in its toolkit as “victory against inflation is in sight.”
Regarding monetary policy, Federal Reserve officials remained muted during the week. However, Fed officials had adopted a more gradual stance on monetary policy. In his last appearance in the media, Fed Chair Powell said they’re in no rush to cut rates. Michelle Bowman echoed some of his words, commenting that patience is required before making further monetary policy adjustments.
Money market futures had priced in that the ECB would cut rates by 25 bps at the December meeting, suggesting that the bank's Deposit Facility rate would be 3%. Into the next year, investors estimate 100 bps of easing in the first half of 2025.
In the US, market players had priced in a 65% chance of a 25 bps of easing, leaving the fed funds rate at 4.25%-4.50% range. For the next year, futures traders expect just one rate cut in the first semester.
Going forward, if the EU sees further economic deterioration, coupled with good inflation readings, the ECB could be forced to ease policy more aggressively. Conversely, the robustness of the US economy and a possible expansionary fiscal policy by the upcoming Trump administration could prevent the Fed from easing policy due to inflationary pressures.
Hence, further EUR/USD downside is expected based on central bank policy divergence.
Looking ahead, the EU will feature the release of inflation figures on Friday, alongside Germany’s jobs report. In the US, the calendar is absent, yet next week would be busy with the S&P Global and ISM Manufacturing PMI, Fed speakers, jobs data, and next Friday’s Nonfarm Payrolls.
EUR/USD Price Analysis: Technical outlook
If the EUR/USD climbs sustainably above 1.0600, buyers must reclaim the November 6 swing high of 1.0609 if they want to remain hopeful for higher prices. Once cleared, this would pave the way to test 1.0682, the latest swing low reached on November 6.
Conversely, if sellers stepped in and pushed the EUR/USD below 1.0500, the path would be empty to challenge the November 26 daily low of 1.0424 before launching an attack to the year-to-date (YTD) low of 1.0331.
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