In a subdued trading session on Monday, EUR/USD remains range-bound above the 1.0400 mark, reflecting the light activity typical of year-end holidays. Investors appear to be in a holding pattern, awaiting fresh catalysts as trading volumes stay muted.
The Euro is poised to finish 2024 with a notable 5.5% decline against the US Dollar, driven by several headwinds. Key among these is the European Central Bank’s (ECB) dovish monetary stance, which has weighed heavily on the currency. Additionally, concerns over a potential trade conflict with the United States under the incoming administration of President-elect Donald Trump have further rattled confidence. The looming tariff hikes could disproportionately impact the Eurozone’s export-driven economy.
The ECB has taken an aggressive approach to monetary easing this year, cutting its Deposit Facility rate by 100 basis points to 3%. Further reductions are expected in 2025, with projections suggesting the rate could drop to 2% by mid-year. The central bank is anticipated to implement incremental 25-bps cuts at each meeting in the first half of the year to align with its perceived neutral rate.
Despite the unified monetary approach, internal divisions within the ECB have emerged over the response to US trade policy. President Christine Lagarde, speaking to the Financial Times, warned against retaliatory trade actions, describing them as “bad for the global economy at large.” In contrast, Finnish central bank Governor Olli Rehn argued that the EU’s negotiating position could be bolstered by demonstrating readiness for countermeasures if threatened with higher US tariffs.
On the economic data front, Spain’s Harmonized Index of Consumer Prices (HICP) for December outpaced expectations, with year-over-year inflation rising 2.8% compared to forecasts of 2.6% and the prior reading of 2.4%. Month-on-month, the HICP increased 0.4%, beating the predicted 0.3%. However, underlying inflation remained stagnant in November, underscoring persistent challenges for the broader Eurozone economy.
In the US, attention is shifting to the release of the December ISM Manufacturing PMI later this week, a key indicator that could influence market sentiment as traders prepare for the first days of 2025.
Context:
This report highlights the challenges facing the EUR/USD pair amid low liquidity and broader economic uncertainties, providing insights into monetary policy dynamics, trade concerns, and key economic indicators shaping the outlook for the Eurozone and US economies.