The EURUSD gained as the Dollar extends its downside in a holiday-truncated week.
The DXY Dollar Index, which tracks the greenback’s value against six major currencies, extends its correction below 106.00 on Friday. The Index started correcting on Monday after President-elect Donald Trump nominated Scott Bessent, a veteran hedge-fund manager, for the role of Treasury Secretary.
Financial markets anticipated that Bessent would enact Trump’s economic agenda without disrupting external relations and fiscal discipline.
“The objective of enacting tariffs will be layered in gradually and the budget deficit will be reduced to 3% of Gross Domestic Product (GDP) by slashing spending, a move that won’t result in higher inflation than feared,” Bessent said in an interview with the Financial Times last weekend.
On the monetary policy front, market experts expect the Federal Reserve to be cautious about interest rate cuts as the core Personal Consumption Expenditures Price Index (PCE) data, the Fed’s preferred inflation gauge, accelerated in October.
The probability that the Fed will cut rates by 25 bps to the 4.25-4.50% range in the December meeting is at 66%, while the rest support leaving rates unchanged, according to the CME FedWatch tool.
In Friday’s session, the US Dollar is expected to remain sideways as US markets trade for limited hours on account of Thanksgiving. For the next week, investors should brace for high volatility as a slew of employment and economic data will be published.
EURUSD posted a fresh weekly high near 1.0580 in the European session on Friday ahead of the flash Eurozone Harmonized Index of Consumer Prices (HICP) data for November. The inflation report is expected to show that the annual headline and core HICP – which excludes volatile food and energy prices – accelerated to 2.3% and 2.8%, respectively.
Investors will pay close attention to the inflation report to get fresh cues about the European Central Bank’s likely interest rate cut size in the December meeting. The ECB has already reduced its Deposit Facility Rate by 75 bps to 3.25% this year.
Traders expect the ECB to cut its key borrowing rates at least by 25 bps in the December meeting. For 2025, traders see the ECB cutting interest rates in every meeting through June, pushing the Rate on Deposit Facility lower to 1.75% by the year-end, according to Reuters.
Market speculation for the ECB to cut interest rates by a larger-than-usual 50 bps is upbeat as officials are worried about growing economic risks.
The two largest economies of the Eurozone, Germany and France, are going through a rough phase due to political uncertainty, a scenario that slows down government spending activities. Also, weak German Retail Sales data for October points to economic stagnation.
Month-on-month Retail Sales contracted by 1.5% after rising 1.2% in September. Economists expected the Retail Sales data, a key measure of consumer spending, to decline at a slower pace of 0.3%.
On year, the consumer spending measure rose by 1%, slower than estimates of 3.2% and the prior release of 3.8%.
ECB Governing Council member and Governor of Bank of France François Villeroy de Galhau kept the option of an outsize interest rate cut on the table in his speech on Thursday.
“Seen from today, there is every reason to cut on December 12. Optionality should remain open on the size of the cut, depending on incoming data, economic projections, and our risk assessment,” Villeroy said.
EURUSD chart by TradingView
(Source: OANDA)
