EURUSD trades in a narrow range around 1.0400 in Friday’s European session amid thin trading as market participants stay on the sidelines due to the Christmas holiday.
The pair struggles for direction while the US Dollar ticks higher on firm expectations that the Federal Reserve will follow a gradual policy-easing path as inflation has rebounded slightly in the last three months.
The DXY Dollar Index, which tracks the greenback’s value against six major currencies, remains above the crucial support of 108.00.
The performance of the USD has remained upbeat in the last few months in part by expectations of firm growth under the administration of President-elect Donald Trump and growing speculation of a slowdown in the Fed’s easing cycle.
The latest Fed dot plot showed that policymakers see Federal fund rates heading to 3.9% by the end of 2025, suggesting that there will be two interest rate cuts next year instead of the four trims previously anticipated.
Despite the latest signs from the dot plot, analysts at BCA research say that the Fed will cut rates by more than 50 basis points (bps) next year amid expectations that price pressures will undershoot the central bank’s target of 2% and the jobless rate will rise over the Fed’s forecast of 4.3%.
The report added that fewer interest rate cuts would require a “significant improvement in labour market momentum, a trend shift we don’t view as particularly likely”.
On the economic front, US Initial Jobless Claims data for the week ending December 20 came in lower than expected.
Individuals claiming jobless benefits for the first time surprisingly fell to 219,000 from the former release of 220,000. Economists expected the number of jobless claims to come in higher at 224,000.
The overall outlook of the Euro remains downbeat as the European Central Bank is expected to continue pushing interest rates lower at the current pace until the first half of 2025.
The ECB has already reduced its Deposit Facility rate by 100 bps this year and is expected to deliver another 100-bps interest rate reduction next year as the Eurozone inflation has come under control. Still, inflation is higher than the central bank’s target of 2%.
ECB President Christine Lagarde had said before the Christmas break that she was confident about further progress in the disinflation trend.
“We’re getting very close to that stage when we can declare that we have sustainably brought inflation to our medium-term 2%”, Lagarde said in an interview with the Financial Times. However, she still believes that “we (policymakers) should be very vigilant about inflation in the services sector.”
Recent commentaries from almost all ECB policymakers have indicated that they have agreed to market expectations for a consistent reduction in interest rates until the benchmark deposit rate reaches 2%, which they see as a neutral rate, to avoid risks of inflation undershooting the bank’s target of 2%.
EURUSD chart by TradingView
(Source: OANDA)
