The EUR/USD currency pair is currently trading within a narrow band just above the 1.0400 level, reflecting low trading volumes as investors take a break for the holiday season. The EURO is heading towards the end of the year with a significant loss of approximately 5.5% against the US Dollar, a downturn largely attributed to the dovish stance of the European Central Bank (ECB) and concerns over an impending trade war with the United States.
As market participants shift their focus to upcoming economic indicators, particularly the US ISM Manufacturing PMI for December, trading activity remains subdued. The EURO ’s performance has been particularly impacted in the recent quarter, as the ECB has maintained a cautious approach to interest rates amidst worries about the eurozone’s economic prospects, especially given the potential for increased tariffs from the new US administration.
The ECB has already cut its Deposit Facility rate by 100 basis points to 3% this year, with expectations of a further reduction to 2% by mid-2025, which central bank officials consider to be the neutral rate. Such a trajectory indicates that a consistent 25 basis point rate cut may occur at each ECB meeting in the first half of the upcoming year. Moreover, concerns about inflation remaining below the ECB’s target rate of 2% have been voiced by various policymakers, who have differing opinions on how to tackle the challenges posed by US trade policy.
On the US side, rising Treasury yields have bolstered the Dollar, with analysts predicting that potential tariff hikes could spur economic growth and inflation, compelling the Federal Reserve to adopt a more aggressive monetary stance. The Fed’s projections have indicated that interest rates may hover around 3.9% by the end of 2025, with expectations for rate cuts scheduled in the coming months.
In terms of technical indicators, the EUR/USD pair has shown a bearish trend, remaining above a two-year low of 1.0335. The pair is likely to encounter strong resistance at the 20-day EMA near 1.0500. A sustained decline could lead to a test of the support level around 1.0200 if key low levels are breached.
