EURUSD Bounces Back to the Highs of Almost 1.0550 After a Dive from New Yearly Lows

EUR/USD erased substantial losses after a run of five consecutive negatives, bouncing to the areas around 1.0540 during Asian trading on Friday. This followed the US Dollar Index (DXY) taking its first retreats from the newest yearly high reached at 107.06. Both dovish comments by Federal Reserve Chairman Jerome Powell and mixed US economics data influenced the move. Despite the strength in Euro, the European Central Bank still remains cautious on the economic outlook, leaving its future movements toward the pair subject to developments both in the US and the Eurozone.

EUR/USD’s Recent Rebound and the Pullback in the US Dollar

The currency pair EUR/USD recovered some of the losses because of a correction within the US Dollar. As the US Dollar Index (DXY) had skyrocketed to 107.06 for the year, the reversal in this upward trend for the greenback, as well as its corresponding reversal for the Euro itself, contributed to a modest rebound for the Euro, and EUR/USD advanced toward 1.0540.

US Dollar Pulls Back

Some of the factors behind the U.S. Dollar’s pullback have been the slowdown of so-called “Trump trades,” that had been helping the dollar out in the first half of the year. These trades-tied very closely to expectations surrounding economic policies from the previous U.S. administration-have started to lose some of their momentum as market sentiment shifts.

Simultaneously, comments from Fed Chair Jerome Powell regarding the US economy lighten the tone of the US Dollar. Powell described the US economic performance as “remarkably good, thus giving Federal Reserve some leniency to slowly trim its interest rates. Contrastively, such rhetoric is diametrically opposed to the more hawkish tone that had prevailed in communications until now by the Fed, thus questioning a change in policy that should continue to weaken the Dollar at least in the short term.

Mixed US Economic Data

Powell’s comments came simultaneously with the release of US PPI numbers. The PPI index increased 2.4% year-over-year in October, beating the revised 1.9% of September and more than the market’s expectations of 2.3%. Meanwhile, the Core PPI for the month rose 3.1% YoY from 3.0% expectation, which eliminates food and energy prices. Although the data showed inflationary pressures were on the rise, which would play into the hands of the USD in the long run, the immediate reaction was tame because attention shifted to Powell’s more dovish talk over interest rates.
The convergence of these factors saw DXY pull back, falling to around 106.80 at time of writing, providing some respite to the Euro and pushing EUR/USD higher from recent lows.

EUR/USD Daily Chart

Source: TradingView, by Richard Miles

ECB in a Catch 22 Situation: How to Cut Rates while Tackling Inflation

Though the Euro has gained a few percent against the US Dollar, European Central Bank ECB is now caught between the politics of rate cuts, and home-grown inflationary concerns. Home-grown inflationary pressures-the central issue for ECB officials-arise from the boost in wages.

ECB is emphasizing more on cutting of interest rates.

Showing an increased receptivity to cut rates, the central bank at the monetary policy meeting in October signaled that it was indeed turning its ears to the calls of the reducing economy. This news marks a change in tone especially since the growth fell way slower than expected, and equally, inflation data in the Eurozone remains weak. For Isabel Schnabel, an ECB board member, interest rates remain the prime instrument for policy changes but the secondary adding instruments are buys on bonds and forward guidance.

While the ECB is paying increasing attention to cuts in rates, it has been quite cautious in taking concrete steps for some time now because the inflationary pressures continue unabated in the Eurozone. With hard-striving increases in wages coupled with the growth in labor productivity lagging behind, the raised fears of a wage-price spiral – where the increase in wages leads to higher prices that trigger even more wage increase in a spiral ride – belie this potential outcome working adversely for the ECB’s desired goal of putting inflation back on track.

ECB Cautious on Inflationary Pressures

The ECB is more sensitive to the realization that an early policy response, in this case, even some rate cuts, will mean high inflationary pressures. The central bank has thus indicated a need for more data before doing significant policy changes. The situation remains fluid, and the ECB is likely to continue monitoring the economic and inflationary landscape very carefully before making its next move.

Meanwhile, the Eurozone is likely to continue struggling to find elusive momentum in growth. Most analysts think it will slow down in 2025. Cut in rates by the ECB would weaken the Euro further though the timing and full quantum of cut are still unclear.

Key Economic Data to Watch

The movements of the EUR/USD pair are likely to be sensitive to these upcoming data releases, especially from both the US and the Eurozone. Here are some of the key economic events and indicators to monitor in the coming days:

US Economic Data

US Retail Sales (October): Details about US retail sales may help explain the soundness of the US consumer-the very pulse of the whole economy. Better-than-expected retail sales can also be an additional strength for the US dollar if it translates to continued demand despite higher inflation.

US CPI (Consumer Price Index): The main ‘event’ in the Dollar’s line-up will be the release of the US CPI report. In case inflation remains at these levels or even increases further, then this might lead to ideas about the Fed rate policy turnaround and hence a boost for the USD.

Eurozone Economic Data

Eurozone GDP Growth (Q3): The GDP data for the Eurozone will say much about its general health. Weaker growth than expected would only raise more concerns regarding the Euro outlook, while stronger growth could support the Euro in the short term.
Eurozone CPI (Oct): Eurozone inflation data remains one of the most important determinants of the ECBs policy decisions. If inflation truly does prove sticky, the ECB will likely avoid cutting rates which would be positive for the Euro

ECB and Fed Policy Meetings

ECB Meeting (November): The next ECB policy setting will be watched closely for changes to the trend of the interest rate. Traders will watch keenly for any signs that the ECB may be dovish, especially if inflationary pressures abate.

Fed Meeting (November): The FOMC meeting next month would be a crucial determinant of the US monetary policy stance moving forward. A hint at a dovish Fed at this juncture would place immense downside pressure on the USD. That might offer a tailwind to EUR/USD.

Technical Outlook for EUR/USD

The EUR/USD currency pair has started to begin recovering lately. However, the technical levels are now going to decide the course for the pair.

Resistance: Key levels are: Support: End

Resistance @ 1.0600: The first key resistance for EUR/USD is the area around 1.0600 that has acted as a psychological resistance level lately. A break above it could continue the rally of the Euro into 1.0700.
Support at 1.0500: On the other hand, 1.0500 continues to be a critical support for EUR/USD. If the pair is not able to sustain its rally and moves below this point, then 1.0450 presents significant support that tests the yearly lows.
RSI Analysis
This measure of the 14-day RSI of EUR/USD currently comes in at just about the middle of the neutral range at 50. A close above here would confirm the continuation of the uptrend, while a move below it could indicate a change back into the downtrend.

EUR/USD’s outlook continues to be tied to US and Eurozone data.

European Yuan/US Dollar broke its losing streak with help of a pullback in the US Dollar and dovish remarks from Fed Chairman Jerome Powell. However, with the outlook still uncertain regarding the Euro, given the inflationary pressures that the ECB will face, and potential cuts in rates, EUR/USD may require more convincing arguments in the following days. The near-term EUR/USD path is going to be crucially dependent on the incoming economic reports in the US and the Eurozone, as well as cues from the central banks on future policy actions.

In that regard, an eye should be kept sharp because the technical and fundamental landscape for EUR/USD is dynamic. It is supported, indeed, by key support and resistance levels.

FAQ

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.