EUR/USD remains on the back foot at around 1.0300 in the European session on Thursday. The pair bears the brunt of the UK bond market sell-off, with 10-year Gilt yields at their highest since August 2008. The 14-week Relative Strength Index (RSI) has slid to near 30.00, indicating strong downside momentum. Meanwhile, ongoing pressure mounts from a strengthening US Dollar (USD), with the US Dollar Index (DXY) aiming to revisit a two-year high of 109.53.
The European Central Bank (ECB), headquartered in Frankfurt, Germany, serves as the reserve bank for the Eurozone. Its primary mandate is to maintain price stability, which involves controlling inflation or stimulating growth. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Relatively high interest rates—or the expectation of higher rates—typically benefit the Euro; however, the ECB is currently easing its monetary policy at a usual pace of 25 basis points amid a weak economic outlook.
In 2022, the EUR/USD accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion. As the most heavily traded currency pair globally, it accounts for an estimated 30% of all transactions. Various economic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys, influence the direction of the single currency. Recently, Eurozone Retail Sales data for November came in weaker than expected, adding to the Euro's challenges.
The latest Economic Confidence (EC) survey by Capital Economics suggests that the trade bloc's economic performance remained stagnant in the last quarter of 2024. This stagnation adds to the pressure on the Euro as investors weigh monetary policy adjustments and economic outlooks.
“Participants expected inflation to keep moving toward 2%, but effects of potential trade and immigration policy changes suggested that the process could take longer than previously anticipated,”
This statement reflects the complexities involved in managing inflation in a volatile global economic landscape. The official employment data will also play a crucial role in influencing market expectations about when the Federal Reserve (Fed) might deliver its first interest rate cut of the year.
The ECB's cautious approach contrasts with the Fed's stance, which appears more aggressive amid rising inflationary pressures. This divergence in monetary policy between the ECB and Fed further influences the EUR/USD dynamics.
“We don't want to overreact to any one data point in an environment where things may bounce around considerably.”
This sentiment underscores the need for prudence in interpreting economic data amidst fluctuating market conditions. As traders and analysts evaluate these indicators, they remain vigilant about potential shifts in market sentiment and policy responses.