The EUR/USD currency pair remains cautious, trading around 1.0420 during Thursday’s European session as investors await key economic decisions and data releases. The European Central Bank (ECB) is widely expected to lower its Deposit Facility Rate by 25 basis points to 2.75%, and the Main Refinancing Operations Rate is anticipated to decline to 2.9%. With the ECB's policy meeting looming, market participants are on tenterhooks, refraining from taking substantial positions. Meanwhile, the US Dollar is in recovery mode amid prevailing risk aversion, holding the US Dollar Index (DXY) around 108.00.
The ECB is poised to leave open the possibility for further policy easing even as it makes these initial rate adjustments. This move comes as the Federal Reserve (Fed) decided to keep interest rates steady within the 4.25%-4.50% range on Wednesday. The EUR/USD pair is experiencing a sideways trend, partly due to the Fed's recent monetary policy announcement, which has left the market uncertain.
Flash German GDP data revealed the economy contracted by 0.2% year-over-year in the last quarter of 2024. This disappointing figure, coupled with underwhelming Eurozone preliminary GDP data, has prevented the EUR/USD pair from gaining traction, keeping it trading narrowly above 1.0400 on Thursday. Economists predict that the shared bloc expanded by a modest 0.1%, further adding to the cautious sentiment surrounding the euro.
Investors are particularly focused on upcoming reports, including the US Q4 advance GDP data, which is expected to show an annualized economic growth rate of 2.6%. As these releases approach, the market remains wary, with traders hesitant to make large moves.
"The committee is very much in the mode of waiting to see what policies are enacted." – Powell
This statement by Powell reflects the current cautious sentiment in the markets as investors wait for concrete policy measures and their potential impacts.
The 14-day Relative Strength Index (RSI) for the EUR/USD pair recently recovered from below the 40.00 level but struggled to surpass the 60.00 hurdle, indicating a sideways trend may persist. This technical indicator suggests that momentum in the market is lacking, further highlighting traders' cautious stance.
In terms of broader economic impacts, the potential rate cut by the ECB comes amid ongoing concerns about inflation and labor market weaknesses in Europe. These issues are integral to the central bank's decision-making process as it seeks to balance growth with price stability.
"Real progress on inflation or at least some weakness in the labor market" – Powell
Powell's insights underscore the challenges facing both European and US economies as they navigate post-pandemic recovery efforts.
Market analysts suggest that the EUR/USD pair's current trajectory will depend heavily on forthcoming economic data and central bank decisions. The potential for further policy easing by the ECB could provide temporary relief for the euro but may also signal underlying economic troubles that warrant caution.