EUR/USD remains vulnerable as US Dollar holds onto two-year high

EUR/USD trades cautiously near 1.0350 as the US Dollar clings to gains.
The USD sees more upside as the Fed has guided fewer rate cuts in 2025.
Investors expect the ECB to cut interest rates steadily by 25 bps in each meeting till June.

EUR/USD trades vulnerable and holds near a more-than-a-month low at around 1.0350 on the first trading day of the year. The major currency pair skates on thin ice as the US Dollar (USD) clings to a more than two-year high, with the Dollar Index (DXY) trading around 108.50 on optimism that the Federal Reserve (Fed) will reduce interest rates less than previously anticipated this year.

The Fed cut its key borrowing rates by 100 basis points (bps) in 2024 as policymakers were more worried about higher risks to employment than upside risks to inflation. However, they have guided fewer interest rate cuts for this year amid an upbeat United States (US) economic outlook. Additionally, a slowdown in the disinflation trend also compelled officials to favor a gradual policy-easing cycle.

The latest dot plot at the Fed’s Summary of Economic Projections showed that policymakers collectively see Federal Fund rates heading to 3.9% by the end of 2025, higher than the 3.4% forecasted in September.

According to the CME FedWatch tool, the central bank is almost certain to keep interest rates unchanged in the range of 4.25%-4.50% in the January meeting.

Going forward, the US Dollar will be guided by the United States (US) ISM Manufacturing Purchasing Managers Index (PMI) data for December, which will be released on Friday. The PMI is expected to tick lower to 48.3 from the prior release of 48.4, suggesting that the manufacturing sector activities contracted at a slightly faster pace.

Daily digest market movers: EUR/USD walks on thin rope amid weak Euro

EUR/USD is also under pressure due to the weak Euro’s (EUR) outlook. The shared currency edges slightly higher on Thursday against the US Dollar. Still, it could face selling pressure as the European Central Bank (ECB) is expected to continue its steady rate-cut cycle until June. This suggests that there will be four interest rate cuts, pushing the Deposit Facility rate lower to 2%.
Market participants expect further policy easing as Eurozone price pressures are on track to return sustainably to the ECB’s target of 2%.
Additionally, investors price in a sharp decline in European exports due to higher import tariffs from the US under the administration of incoming President Donald Trump.
For more cues on inflation, investors await preliminary German and Eurozone Harmonized Index of Consumer Prices (HICP) data for December, which will be released early next week. Investors will pay close attention to the HICP data as it will indicate whether the ECB will continue easing interest rates at a steady pace of 25 basis points (bps) or pivot to a larger-than-usual pace of 50 bps.
ECB policymaker and Irish central bank chief Gabriel Makhlouf warned in an interview with the Financial Times (FT) on December 23 that some elements of services inflation in the Eurozone were a bit concerning, which underscores the need for “gradual interest rate cuts, rather than big leaps” unless the facts and evidence changed.
On the economic front, final estimates for HCOB Manufacturing PMI for December showed that factory activities contracted at a slightly faster pace to 45.1 from the preliminary reading of 45.2.

Euro PRICE Today

The table below shows the percentage change of Euro (EUR) against listed major currencies today. Euro was the strongest against the Canadian Dollar.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.04%	0.16%	-0.50%	0.23%	-0.24%	-0.19%	-0.08%
EUR	-0.04%		0.05%	-0.45%	0.17%	-0.25%	-0.27%	-0.12%
GBP	-0.16%	-0.05%		-0.57%	0.08%	-0.40%	-0.34%	-0.28%
JPY	0.50%	0.45%	0.57%		0.65%	0.18%	0.17%	0.29%
CAD	-0.23%	-0.17%	-0.08%	-0.65%		-0.48%	-0.45%	-0.32%
AUD	0.24%	0.25%	0.40%	-0.18%	0.48%		-0.02%	-0.05%
NZD	0.19%	0.27%	0.34%	-0.17%	0.45%	0.02%		0.17%
CHF	0.08%	0.12%	0.28%	-0.29%	0.32%	0.05%	-0.17%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).

Technical Analysis: EUR/USD oscillates near two-year low

EUR/USD consolidates in a Descending Triangle formation on a daily timeframe. The horizontal support is plotted from the two-year low around 1.0330, while the downward-sloping border is drawn from the November 6 high of 1.0937. The outlook of the major currency pair remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0433 and 1.0556, respectively, are declining.

The 14-day Relative Strength Index (RSI) slides below 40.00, indicating that downside momentum is intact.

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

Economic Indicator

HCOB Manufacturing PMI

The Manufacturing Purchasing Managers Index (PMI), released on a monthly basis by S&P Global and Hamburg Commercial Bank (HCOB), is a leading indicator gauging business activity in the Eurozone manufacturing sector. The data is derived from surveys of senior executives at private-sector companies from the manufacturing sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the Euro (EUR). Meanwhile, a reading below 50 signals that activity among goods producers is generally declining, which is seen as bearish for EUR.