02 Dec 2024

The EUR/USD currency pair is currently facing a notable loss of momentum as it approaches the critical support level of 1.0530 during the Asian trading session on Monday. This development comes in the wake of recent economic data, particularly the inflation figures from the Eurozone, which revealed a year-on-year increase to 2.3% in November, up from 2.0% in October. This rise in inflation aligns with market expectations and exceeds the European Central Bank's (ECB) target of 2.0%, indicating persistent price pressures within the region.

In addition to the inflation data, the Core Harmonized Index of Consumer Prices (HICP) also showed an uptick, rising by 2.8% year-on-year in November compared to 2.7% in the previous month. This data suggests that underlying inflationary pressures remain robust, which could influence the ECB's monetary policy decisions moving forward.

Despite these inflationary signals, market participants are bracing for a 25 basis points (bps) rate cut from the ECB in December, which would mark the fourth reduction this year. However, the sentiment surrounding a more aggressive 50 bps cut has waned, as recent indicators suggest slight improvements in the Eurozone's growth outlook. This anticipated rate cut is contributing to downward pressure on the Euro, as investors adjust their expectations in light of the ECB's potential actions.

On the other side of the Atlantic, the US Dollar is receiving support from the Federal Reserve's cautious approach to monetary policy. Fed Chair Jerome Powell has indicated that the current economic conditions do not necessitate rapid rate reductions, allowing the Fed to adopt a more measured stance. This has led to a prevailing sentiment in the market that the Fed may not be as aggressive in cutting rates as previously thought. According to the CME FedWatch Tool, there is now a nearly 65.4% probability that the Fed will implement a quarter-point rate cut in December, reflecting a more tempered outlook for US monetary policy.

As a result of these dynamics, the EUR/USD pair is encountering selling pressure around the 1.0530 level, influenced by the stronger US Dollar in early Asian trading. Investors are closely monitoring upcoming events, particularly the speech from ECB President Christine Lagarde, which could provide further insights into the central bank's policy direction. Additionally, the release of the US ISM Manufacturing Purchasing Managers' Index (PMI) later on Monday is also highly anticipated, as it may offer clues about the health of the US manufacturing sector and influence market sentiment.