The Euro-Dollar traded cautiously in a narrow range near the key level of 1.0300 in Friday’s North American session. The EURUSD currency pair oscillated within the previous day’s trading range, with investors focusing on President-elect Donald Trump’s inauguration on Monday.
Investors await Trump’s announcement of new economic policies for fresh cues about the US economic outlook and the likely global trade environment. Market experts believe that Trump’s policies will boost inflation and economic growth and lead to a global trade war.
While testifying at a Senate Finance Committee on Wednesday, Trump’s treasury pick, Scott Bessent, said there is an urgent need to conclude the current tax regime to avoid the burden of a $4 trillion tax on the middle class.
“If we do not renew and extend, then we will be facing an economic calamity,” Bessent said. He also supported Trump’s protectionist policies as they would help combat unfair trade practices and increase the US’s negotiating power.
Meanwhile, the DXY Dollar Index, which tracks the greenback’s value against six major currencies, ticks higher and holds the key support of 109.00. The US Dollar remains broadly firm even though traders started pricing in at least one interest rate cut by the Federal Reserve this year.
Traders have raised Fed dovish bets as the core Consumer Price Index (CPI) – which excludes volatile food and energy prices – decelerated to 3.2% in December, the lowest level in over four years.
The Euro’s outlook remains weak amid firm European Central Bank dovish bets. Traders are pricing in a 25 basis points interest rate cut by the ECB in each of the following four policy meetings amid growing concerns over the Eurozone economic outlook and price pressures remaining under control.
ECB officials are also comfortable with more interest rate cuts. The ECB minutes of the December meeting showed on Thursday that policymakers discussed the pace of policy-easing this year more than pausing or continuing the interest rate cut cycle.
The minutes also showed that officials heavily debated announcing a larger-than-usual interest rate cut of 50 bps to provide insurance against the downside risks to growth, which are exacerbated by global and domestic political uncertainties.
There was a clear shift of communication from the “return of inflation to ECB’s target of 2%” to “keeping inflation sustainably at their target”.
The ECB minutes also showed that officials were worried about growing risks to inflation undershooting the central bank’s target of 2%.
Worries about the EURUSD pair falling to parity have accelerated as Trump’s return to the White House is on the horizon. Trump is expected to decide to push import tariffs higher soon, a scenario that will be unfavorable for the EU export sector.
On Thursday, ECB policymaker and the Governor of the Bank of Greece Yannis Stournaras said that policy should continue with a “series of rate cuts” at the next meetings. His dovish stance was based on the assumption that fresh protectionist measures imposed by the US could lead to “below-target Eurozone inflation.”
EURUSD chart by TradingView
(Source: OANDA)