Daily Price Outlook
During the European trading session on Monday, the EUR/USD currency pair edged higher, staying bullish around 1.0347, despite facing some negative factors. The pair gains could be limited as many analysts predict that it could drop further.
This expectation is mainly due to the different paths the Federal Reserve (Fed) and the European Central Bank (ECB) are taking with their monetary policies. The Fed is likely to stay on its tightening course, while the ECB might face challenges in keeping up.
Moreover, the Eurozone Sentix Investor Confidence Index showed a decline, which adds to the negative sentiment surrounding the Euro.
The economic outlook for Germany, a key player in the Eurozone, is also getting worse, which could further drag down the Euro. This situation could lead to more bearish pressure on EUR/USD in the coming days.
Traders will be watching closely for economic data later today, including the HCOB Composite Purchasing Managers' Index (PMI) for the Eurozone and the preliminary Consumer Price Index (CPI) data for Germany.
These reports could provide more clues about the future direction of the Euro and whether the expected bearish trend for EUR/USD will continue.
ECB's Easing Stance and Eurozone Economic Weakness Weigh on EUR/USD
On the EUR front, the European Central Bank (ECB) policymakers are leaning towards continuing their current approach of easing monetary policy.
The markets have already priced in a 113 basis point (bps) cut in ECB interest rates this year, which means at least four rate cuts of 25 bps each.
This outlook is due to rising concerns that inflation in the Eurozone is still far from the ECB's target of 2%.
In an interview on Thursday, ECB Governing Council member Yannis Stournaras from the Bank of Greece suggested that the ECB’s base interest rates should be reduced to around 2% by autumn.
This indicates that the ECB could lower its Deposit Facility rate at each of the next four meetings, reflecting a cautious approach to tackle inflation and economic challenges.
On the data front, the latest data from the Eurozone Sentix Investor Confidence Index showed a slight decline in January, dropping to -17.7 from -17.5 in December.
Additionally, the Current Situation gauge, which reflects the overall economic mood, hit its lowest point since October 2022, falling to -29.5 from -28.5 in December.
Sentix warned that the economic situation in the Eurozone is worsening, with Germany’s recession weighing heavily on the region’s economic growth.
Therefore, the ECB's expected rate cuts and the weakening economic outlook in the Eurozone, particularly in Germany, could put downward pressure on the Euro. This may lead to a bearish sentiment for EUR/USD, potentially causing the pair to decline further.
US Dollar Strengthened by Fed's Cautious Approach to Rate Cuts
On the US front, the broad-based US dollar has been supported by the Federal Reserve’s more cautious stance on rate cuts. After three consecutive rate reductions, the Fed is expected to pause its easing cycle during the January meeting.
The latest projections from the Fed’s Summary of Economic Projections show that policymakers anticipate the Federal Funds Rate will reach 3.9% by the end of the year, with just two rate cuts expected in 2025.
Fed officials are signaling a more careful approach to further rate reductions. Richmond Fed President Thomas Barkin noted that the policy rate should remain high until there is more confidence that inflation will return to the Fed’s 2% target. This indicates that the Fed is in no rush to lower rates quickly, as inflation remains a concern.
Moreover, other Fed officials, including Governor Adriana Kugler and San Francisco Fed President Mary Daly, have emphasized the difficult balancing act the US central bank faces.
They are trying to reduce rates without triggering runaway inflation, which could weigh on the economy. This cautious approach adds to the overall strength of the US dollar as markets expect slower and more gradual rate cuts in the near future.
EUR/USD – Technical Analysis
EUR/USD is trading at $1.03107, marking a slight increase of 0.03% during the day as the pair consolidates near critical levels. The 4-hour chart indicates a cautious market sentiment, with the price testing immediate support at $1.02579.
This support is crucial to preventing further downside, as a break below this level could expose the pair to deeper retracements toward $1.02109 and $1.01664.
On the upside, the pair faces immediate resistance at $1.03929, followed by $1.04582 and $1.05136. A breakout above $1.03929 could spark bullish momentum, potentially targeting the higher resistance levels.
However, with the price currently below the 50-day EMA at $1.03769, bearish sentiment remains dominant in the near term.
The Relative Strength Index (RSI) stands at 41, reflecting subdued momentum and hinting at potential oversold conditions.
Traders may focus on the pivot point at $1.03453, which acts as a key level for determining the next directional bias.A sustained move below this pivot could solidify the bearish trend, making short positions favorable.
For intraday trading, selling below $1.03461 with a target of $1.02586 appears prudent, while a stop-loss at $1.03944 safeguards against unexpected reversals.
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