EURUSD Hits Fresh Annual Lows Amid US Dollar Strength and Trump’s Trade Momentum
The EUR/USD currency pair has been under significant pressure lately, sinking to new annual lows around 1.0530. The continued weakness of the Euro against the US Dollar (USD) is primarily driven by a combination of factors, including the aftermath of the US presidential election, inflationary pressures in the US, and a shift in market expectations surrounding the Federal Reserve’s interest rate policy. In this analysis, we’ll examine the forces driving the EUR/USD exchange rate, the technical outlook, and key market events to watch for.
EUR/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
US Dollar Strength Boosted by Trump’s Trade Agenda
One of the key drivers behind the strengthening of the USD is the momentum following the election of Donald Trump. With Republicans securing control of both the Senate and the House of Representatives, Trump is poised to implement his economic agenda, which includes tax cuts and higher import tariffs. This has resulted in a surge of confidence in the US Dollar, as investors anticipate that Trump’s policies could stimulate domestic growth, potentially leading to higher inflation.
Impact of Trade Tariffs on the Eurozone
The implementation of higher import tariffs is expected to particularly impact the Eurozone’s export sector. The region is a major exporter to the United States, and higher tariffs on European goods could dampen demand for those goods, hurting Eurozone growth. This could weaken the Euro further, especially if it leads to slower-than-expected GDP growth in the region.
Inflationary Pressures in the US and Interest Rate Expectations
The US inflation data for October has also supported the USD. The Consumer Price Index (CPI) showed that price pressures were building, as expected, on both a monthly and annual basis. The CPI release significantly influenced market expectations, increasing the likelihood of a Federal Reserve interest rate cut in December. According to the CME FedWatch Tool, the probability of a 25 basis point rate cut surged to 83% from 59% a day earlier, further bolstering the Greenback’s bullish momentum.
Market Eyes on Federal Reserve’s December Policy Decision
As investors digest the US inflation data, they are eagerly awaiting further guidance from the Federal Reserve on future interest rate decisions. On Thursday, Federal Reserve Chair Jerome Powell will participate in a panel discussion at the Federal Reserve Bank of Dallas at 20:00 GMT. Powell’s comments will be closely scrutinized, as they could provide additional insight into the Fed’s stance on interest rates in the coming months, as well as the broader economic impact of Trump’s proposed policies.
US Economic Data: Jobless Claims and PPI
Along with Powell’s speech, investors will focus on other key US economic data, including the Initial Jobless Claims for the week ending November 8 and the Producer Price Index (PPI) for October. Both reports, scheduled for release at 13:30 GMT, will be critical in assessing the strength of the US economy and gauging the likelihood of additional Fed rate cuts.
Euro Faces Downside Pressure from Eurozone Issues
The Euro (EUR) has faced significant challenges in recent weeks, not only from Trump’s trade policies but also from internal European issues. The political situation in Germany has added to concerns about the Euro’s outlook. On November 6, German Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, leading to the collapse of the country’s three-party coalition government. This political instability is likely to weigh on the Euro in the near term, as investors may be wary of the impact on fiscal and economic stability within Europe.
Potential Impact of Trump’s Tariffs on the Eurozone
The prospect of Trump’s trade tariffs on the Eurozone’s export sector is a growing concern. A significant decline in exports would likely slow economic growth in the region, putting additional pressure on the Euro. If these trade restrictions lead to a marked slowdown in the Eurozone economy, it could result in further depreciation of the Euro, potentially bringing the EUR/USD exchange rate closer to parity, according to analysts at major banks like JPMorgan and Deutsche Bank.
ECB’s Policy Outlook and Inflation Expectations
In addition to political instability, the European Central Bank (ECB) is facing its own challenges. The ECB has signaled that it may need to implement additional interest rate cuts if inflation remains subdued. ECB Governing Council Member Olli Rehn indicated on November 12 that the ECB might reduce its Deposit Rate to the so-called neutral rate between 2% and 2.25% in the first half of 2025. This dovish outlook for the ECB further weighs on the Euro, as lower rates in the Eurozone could make the EUR less attractive compared to the USD, especially given the Fed’s potentially more aggressive policy moves.
Technical Analysis: EUR/USD Breaks Key Support Levels
From a technical perspective, the EUR/USD has been in a pronounced downtrend, with the pair recently breaking below the April 16 low of 1.0600. The move below this key support level has triggered further selling pressure, with the pair falling to its lowest levels since November 2023, near 1.0530.
Bearish Momentum and Moving Averages
The technical outlook for EUR/USD remains bearish, with all short- to long-term Exponential Moving Averages (EMAs) indicating downward momentum. The 14-day Relative Strength Index (RSI) has also dipped to nearly 30.00, suggesting that the pair is in oversold territory. However, this also implies that the downside may be limited in the short term, and a potential rebound could occur if the selling pressure eases.
Key Support and Resistance Levels
Looking ahead, EUR/USD is expected to find support near the psychological level of 1.0500. A break below this level could open the door for further declines towards 1.0400 or even parity. On the upside, the key resistance level for Euro bulls is the round-number 1.0700, which would need to be breached for any meaningful reversal to take place.
EUR/USD Faces Challenging Conditions Ahead
The outlook for EUR/USD remains negative, with several factors contributing to the strength of the US Dollar and the weakness of the Euro. Trump’s trade policies, ongoing inflation pressures in the US, and a dovish ECB stance are all key elements that suggest further downside risks for the Euro. Technical indicators also support a bearish view, with the pair breaking key support levels and signaling the potential for continued weakness. Investors should watch for Powell’s comments, US economic data, and European political developments in the coming days, as these could offer more clarity on the future direction of EUR/USD.
