13 Dec 2024

EUR/USD is facing challenges near a multi-week low, influenced by various factors.

The dovish perspective of the European Central Bank is perceived to weaken the euro, while the US dollar remains strong.

Expectations that the Federal Reserve will maintain a cautious approach, coupled with increasing US bond yields, bolster the dollar's position.

The EUR/USD pair is experiencing a decline during the Asian trading session on Friday, reaching a near three-week low around the 1.0455 mark in the last hour. Additionally, the underlying fundamentals indicate that the most likely direction for spot prices is downward, reinforcing the likelihood of a continuation of the recent downtrend.

The euro is being pressured by the dovish stance of the European Central Bank (ECB) and growing concerns regarding the weakening Eurozone economy. Notably, the ECB implemented its fourth interest rate cut of the year on Thursday and signaled the possibility of further easing measures in 2025. This situation creates a significant contrast with the expectations surrounding a less dovish Federal Reserve (Fed), thereby supporting the negative outlook for the EUR/USD pair.

The recent release of the US Consumer Price Index (CPI) and the Producer Price Index (PPI) has revealed that efforts to reduce inflation to the Federal Reserve's 2% target have nearly come to a standstill. Additionally, the increasing market belief that US President Donald Trump's expansionary policies will heighten inflationary pressures indicates that the Federal Reserve may take a more cautious approach regarding interest rate reductions in the future.

This scenario is likely to support a further increase in US Treasury bond yields and helps the US Dollar (USD) maintain the gains achieved over the past week, reaching a new monthly high on Thursday. Moreover, ongoing geopolitical uncertainties related to the Russia-Ukraine conflict and tensions in the Middle East, along with concerns over trade wars, continue to bolster the safe-haven appeal of the USD, applying downward pressure on the EUR/USD pair.

However, traders appear hesitant to make significant moves and may choose to remain on the sidelines in anticipation of the important two-day FOMC monetary policy meeting scheduled for next week. The results of this meeting will be closely monitored for new insights regarding the Fed's approach to rate cuts, which will likely influence the short-term direction of the Greenback and the EUR/USD pair. Nonetheless, the prevailing fundamental conditions seem to favor bearish traders.