EUR/USD is stuck trading within a tight range around 1.0400. This is happening during a week that’s been shortened by holidays and has seen thin trading volumes.
ECB’s View on Inflation
European Central Bank (ECB) President Christine Lagarde has stated that she’s confident about inflation sustainably returning to the bank’s target of 2% sooner than earlier thought. She also mentioned in an interview with the Financial Times (FT) that the ECB is “very close” to declaring that inflation has been brought sustainably to its medium-term target. However, she warned that the central bank should remain vigilant regarding inflation in the services sector as while headline Eurozone inflation has eased to 2.2%, service inflation is still high at 3.9%.
UBS Prediction on Fed’s Rate Cuts
According to UBS, the Federal Reserve (Fed) will carry out two interest rate cuts next year, specifically in June and September.
USD’s Broader Outlook and Influencing Factors
USD’s Firm Outlook
The broader outlook for the US Dollar (USD) remains firm. The Federal Reserve has guided for fewer interest rate cuts for 2025. In the latest dot plot, the Fed signaled only two interest rate cuts in 2025 compared to the four cuts projected in September.
Reasons for Fed’s Measured Approach
Latest commentaries by Fed officials show that they’ve adopted a more measured approach to interest rate cuts. This is due to stubborn inflation, better labor market conditions than previously expected, and the uncertainty over the impact of incoming policies by President-elect Donald Trump on the economy.
Market Focus and Data to Watch
Jobless Claims Data in Focus
Going forward, investors will focus on the US Initial Jobless Claims data for the week ending December 20, which will be published on Thursday. As the US economic calendar is light, investors will pay close attention to this data. Economists estimate that the number of individuals claiming jobless benefits for the first time was at 218K, lower than the previous release of 220K.
EUR/USD’s Overall Outlook
EUR/USD stays broadly under pressure amid dovish ECB bets. In Tuesday’s North American session, it consolidates in a tight range around 1.0400. The overall outlook of this major currency pair is bearish. Traders expect the ECB to cut its Deposit Facility rate by 25 basis points (bps) in each of the next four policy meetings.
Lagarde’s View on Trade
When asked about how the European Union (EU) should address incoming tariffs from US President-elect Donald Trump, Lagarde said that “retaliation was a bad approach because I think that overall trade restrictions followed by retaliation and this tit-for-tat, conflictual way of dealing with trade is just bad for the global economy at large”.
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