Daily Price Outlook
During the European trading session, the EUR/USD currency pair gained momentum, edging higher towards the 1.0321 level. The pair's upward movement was supported by a decline in the safe-haven demand for the US Dollar (USD), particularly in anticipation of US President-elect Donald Trump’s inauguration.
Furthermore, the gains in EUR/USD were amplified as investors positioned themselves ahead of the event.
However, the outlook for the Euro (EUR) remains clouded, as market participants expect the European Central Bank (ECB) to implement a series of interest rate cuts in its upcoming policy meetings, adding uncertainty to the pair's future direction.
EUR Outlook Uncertain Amid Risk-On Sentiment and ECB Rate Cut Expectations
On the EUR front, the shared currency has been gaining strength as investors adopt a risk-on approach, awaiting US President-elect Donald Trump’s inauguration.
Despite this, the outlook for the Euro (EUR) remains uncertain. as traders are concerned that the European Central Bank (ECB) may cut interest rates multiple times in the coming months.
The market is pricing in a 100 basis point reduction by mid-summer, with a 25 basis point cut expected in each of the next four ECB meetings.
These dovish expectations are driven by the belief that Eurozone inflation will slow and return to the ECB’s target of 2%. A key factor contributing to this outlook is the expectation of lower service sector inflation this year.
Analysts at Capital Economics noted that the small rise in inflation in December was mainly due to transport and holiday sectors, which are sensitive to oil prices. They anticipate oil prices will decline, easing inflationary pressures in the Eurozone.
Therefore, the ECB's expected rate cuts and subdued inflation outlook could weaken the Euro, limiting gains for the EUR/USD pair, especially if the US Dollar strengthens due to domestic policies.
US Dollar Pressure and Fed Policy Expectations Could Support EUR/USD Gains
On the US front, the broad-based US Dollar Index (DXY), which measures the dollar's value against six major currencies, has been declining towards the 109.00 level.
The Greenback is under pressure as investors react to the expectation that President-elect Donald Trump will soon declare a national emergency upon taking office.
This would allow him to ramp up domestic energy production and undo some of the climate change policies put in place by President Joe Biden, according to Bloomberg.
Apart from this, Fox News Digital reports that Trump plans to sign over 200 executive orders on his first day in office, which may include policies like stricter immigration controls, tax cuts, and higher import tariffs.
These measures are expected to boost US growth and inflation, which could ultimately be favorable for the US Dollar. Investors anticipate that these changes will allow the Federal Reserve (Fed) to keep interest rates at current levels for a longer period.
Hence, the CME FedWatch tool shows that traders expect the Fed to maintain borrowing rates in the 4.25%-4.50% range for the next three policy meetings.
However, analysts at Morgan Stanley suggest that the Fed may cut interest rates in March, as inflation showed signs of slowing in December.
The Consumer Price Index (CPI) report for December revealed that core inflation, which excludes food and energy prices, rose at a slower pace of 3.2% year-over-year.
Therefore, the declining US Dollar and expectations of longer Fed rate hikes could weaken the USD, supporting potential gains for the EUR/USD pair, especially if Eurozone inflation remains subdued.
EUR/USD – Technical Analysis
EUR/USD is trading at $1.03055, up 0.38%, as the pair hovers around key technical levels amid cautious sentiment in the forex market. The pair has been attempting to recover from recent lows, but upside momentum remains constrained by overhead resistance levels.
On the 4-hour chart, the immediate pivot point stands at $1.03295, a critical threshold that the pair is currently testing. A decisive move above this level could open the door to further gains, with immediate resistance at $1.03720, followed by secondary hurdles at $1.04338 and $1.05030.
However, failure to sustain momentum above the pivot point may reinforce downside pressure, with key support levels at $1.02406, followed by $1.01867, and deeper support at $1.01288, which could act as potential rebound zones.
From a technical perspective, the 50-day EMA, currently positioned at $1.02841, suggests a mildly bullish bias, with prices hovering slightly above it. This could indicate short-term buying interest, but a sustained break below the EMA may signal renewed bearish pressure.
In conclusion, a short position below $1.03304 could offer a favorable risk-reward setup, targeting $1.02405 for take-profit, with a stop-loss placed at $1.03851, ensuring protection against potential upward spikes.
Traders are advised to monitor market sentiment closely, as upcoming economic data releases and geopolitical developments could introduce volatility.
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