Title: EUR/USD Weekly Outlook: Greenback’s Weakness Lifts Euro, Fed’s Path Remains Uncertain
Original Analysis by Valeria Bednarik, FXStreet
The EUR/USD pair advanced for a fourth consecutive week, with the Euro capitalizing on a broadly weaker US Dollar. Recent economic data from the United States further dimmed the outlook for aggressive monetary tightening by the Federal Reserve, forcing market participants to reassess interest rate expectations. This has translated into gains for major currencies against the US Dollar, with the EUR/USD pair inching closer to challenging stronger resistance levels.
Key Takeaways:
– The EUR/USD pair posted another weekly gain as weak US data pressured the Dollar.
– Market pricing reflected dovish expectations from the Federal Reserve.
– European Central Bank (ECB) officials remain cautious about prematurely signaling rate cuts.
– Technical indicators support further upside potential for the EUR/USD in the near to mid-term.
Macroeconomic Background
US Economic Performance Disappoints
The recent string of US economic releases has painted a picture of slowing growth, suggesting the Federal Reserve may be nearing the end of its hiking cycle. The flash figures for November’s Purchasing Managers’ Index (PMI) indicate that output and demand are waning across both the manufacturing and services sectors. According to S&P Global:
– Services PMI fell to 50.8 from 50.6 in October, underscoring persistent sluggishness in the largest component of US GDP.
– Manufacturing PMI dropped from 50 to 49.4, indicating contraction in factory activity.
– Weak job creation was also noted in both sectors, further illustrating growing economic uncertainty.
Another important data point disappointing expectations was the jobless claims report. Weekly unemployment benefit applications rose more than forecasted, with the four-week average of claims trending higher, reflecting a cooling labor market. Initial jobless claims registered at 209,000, slightly below consensus but with the previous week’s reading revised up to 233,000.
– Continuing claims also reached the highest level since 2021, reinforcing concerns about the sustainability of labor market strength.
These developments have prompted markets to recalibrate their Federal Reserve rate path projections. The latest Fed Funds Futures pricing, as reflected by the CME FedWatch Tool, showed increasing bets on rate cuts starting as early as May 2025, with multiple reductions likely through the coming year.
Fed Uncertainty Continues to Hover
Though recent data hint at an economic slowdown, Federal Reserve officials have mostly refrained from declaring victory over inflation. The latest meeting minutes from the Federal Open Market Committee (FOMC), released this past week, highlighted policymakers’ cautious stance. According to the minutes:
– Officials believe that inflation continues to trend downward but is not yet at levels consistent with the 2 percent target.
– The consensus among FOMC members suggests that policy rates will need to remain at restrictive levels for “some time.”
Despite the moderating tone, the Fed reiterated its readiness to hike rates further if inflation starts rising again. Market participants, however, appear less convinced that further tightening will materialize, particularly given signs of economic fatigue.
ECB Offers a Patient Outlook
On the European front, the European Central Bank (ECB) reiterated a patient stance. ECB President Christine Lagarde emphasized that although there has been significant progress on inflation, more evidence is needed before declaring the mission accomplished. Lagarde has repeatedly signaled that rate cuts are not being considered at present, insisting that inflation risks remain tilted to the upside.
Meanwhile, other ECB policymakers expressed a more balanced tone without giving any clear indication of imminent policy easing:
– Governing Council member Isabel Schnabel noted that while inflation has eased, financial conditions remain tight, helping to bring inflation down further.
– Vice President Luis de Guindos mentioned downside risks to growth while expressing satisfaction over the direction of disinflation.
Market Reaction and EUR/USD Development
The combination of cautious tones from both central banks, alongside weakening American data, provided upward
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