EUR/USD stays under pressure on ECB dovish bets as market focus turns to Fed

• EUR/USD falls below 1.0500 as the US Dollar stays broadly firm on expectations that the Fed will cut interest rates but deliver hawkish guidance for 2025.
• ECB officials see the continuation of the gradual policy-easing cycle as appropriate.
• The collapse of German Scholz’s government has paved the way for general elections on February 23.

EUR/USD slides below the psychological resistance of 1.0500 on Tuesday. The major currency pair remains fragile as the US Dollar (USD) ticks higher on expectations that the Federal Reserve (Fed) will adopt a slightly hawkish stance after reducing its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% on Wednesday.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks higher to near 107.00.

According to the CME FedWatch tool, traders have priced in a 25 bps interest rate reduction for Wednesday’s policy meeting. The data also shows that the Fed is expected to leave interest rates unchanged in the January meeting.

Analysts at Macquarie said that the Fed’s stance could turn “slightly hawkish” from “dovish” on the assumption that the “recent slowdown in the pace of US disinflation, a lower Unemployment Rate than what the Fed projected in September, and exuberance in US financial markets are contributing to this more hawkish stance.”

In Tuesday’s session, investors will focus on the United States (US) monthly Retail Sales data for November, which will be published at 13:30 GMT. Economists estimate that Retail Sales, a key measure of consumer spending, rose by 0.5%, faster than the 0.4% growth in October.

Daily digest market movers: EUR/USD falls while US Dollar remains broadly firm

• EUR/USD drops after facing pressure near the key resistance of 1.0530 in Tuesday’s European session. The major currency pair struggles to break above the aforementioned hurdle as its broader outlook of the Euro (EUR) is bearish amid firm expectations that the European Central Bank (ECB) will reduce interest rates at every meeting until June 2025.
• The ECB has delivered a 100-bps interest rate reduction this year and is expected to loosen its monetary policy further by a similar margin next year, given that officials are confident about Eurozone inflation returning to the central bank’s target of 2%. Also, ECB policymakers have become worried about growing economic risks due to weak demand and potential tariffs from incoming US President-elect Donald Trump.
• After the decision to cut rates on Thursday, a number of ECB officials, including President Christine Lagarde, have agreed to the need for more interest rate cuts. On Monday, Lagarde said that the ECB “will cut rates further if incoming data confirm that disinflation is on track”. Lagarde’s dovish remarks on the policy outlook were backed by the assumption that “inflation momentum for services has dropped steeply recently.”
• ECB executive board member Isabel Schnabel, who remains an outspoken hawk, also agreed to a gradual removal of policy restrictions. “Lowering policy rates gradually towards a neutral level is the most appropriate course of action,” Schnabel said at an event in Paris on Monday. However, she warned that the ECB should remain vigilant to any “shocks that have the capacity to destabilize inflation expectations.”
• On the political front, the German parliament has passed the no-confidence motion against Chancellor Olaf Scholz’s government, which paved the way for general elections on February 23. According to market expectations, conservative challenger Friedrich Merz would defeat Scholz.
• In the European session, the German IFO sentiment surveys for December have shown that Business Climate and Expectations at 84.7 and 84.4, respectively, have come in weaker-than-expected. IFO Current Assessment, an indicator of current conditions and business expectations, surprisingly rose to 85.1 from 84.3 in November.

Technical Analysis: EUR/USD wobbles around 1.0500

EUR/USD trades around the psychological figure of 1.0500, where the pair has been hovering for the last four trading days. The major currency pair faces pressure near the 20-day Exponential Moving Average (EMA), which trades around 1.0540, suggesting that the near-term trend is bearish.

The 14-day Relative Strength Index (RSI) revolves around 40.00. The bearish momentum should trigger if the RSI (14) falls below 40.00.

Looking down, the two-year low of 1.0330 will provide key support. Conversely, the 20-day EMA will be the key barrier for the Euro bulls.