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EUR to close year at -5.50% vs USD

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EURUSD trades lackluster above 1.0400 due to illiquid trading activity in the European session on Monday.

The Euro is set to wrap up the year with an almost 5.5% decline against the US Dollar, hit hard during the last quarter as the European Central Bank maintained a dovish guidance on interest rates. Additionally, market participants are worried about the Eurozone’s economic growth as incoming tariff hikes from US President-elect Donald Trump will likely jolt its export sector.

The ECB reduced its Deposit Facility rate by 100 basis points to 3% this year and is expected to lower it to 2%, which policymakers see as a neutral rate, by the end of June 2025. This suggests that the ECB will cut its key borrowing rates by 25 bps at every meeting in the first half of next year.

A slew of ECB policymakers have expressed concerns about the risks of inflation undershooting the central bank’s target of 2%, given the political uncertainty in Germany and the potential trade war with the US. ECB officials have expressed opposing views on how the continent should address the US trade situation.

Last week, ECB President Christine Lagarde said in an interview with the Financial Times that retaliation was “a bad approach” because she thinks that trade restrictions and a tit-for-tat response “is just bad for the global economy at large.”

On the other hand, ECB policymaker and Finnish central bank Governor Olli Rehn said that negotiation is preferable, “and the EU’s negotiating position can be strengthened by demonstrating in advance that it is ready to take countermeasures if the United States threatens Europe with higher tariffs.”

On the economic front, Spain’s preliminary Harmonised Index of Consumer Prices (HICP) data for December has come in hotter than expected. On year, price pressures rose by 2.8%, faster than estimates of 2.6% and the former release of 2.4%. Month-on-month, HICP grew faster by 0.4% from expectations of 0.3%. In November, the underlying inflation remained flat.

EURUSD chart by TradingView

(Source: OANDA)