19 February 2025

EUR/USD Faces Bearish Pressure as US Dollar Strengthens Ahead of CPI Data

The EUR/USD currency pair hit fresh lows around 1.0930 as the US Dollar strengthens ahead of the upcoming CPI data release, indicating a bearish trend in the forex market.

EUR/USD Faces Bearish Pressure as US Dollar Strengthens Ahead of CPI Data

The EUR/USD currency pair experienced a significant decline, hitting fresh lows around 1.0930 just before the release of the US Consumer Price Index (CPI) data. This downturn was largely influenced by the strengthening of the US Dollar, which reached multi-week highs supported by rising yields across the board.

As the US Dollar Index (DXY) approached the 103.00 mark, the market sentiment shifted, reflecting a growing confidence in the US economy. The recent FOMC Minutes indicated that a "substantial majority" of Federal Reserve policymakers favored easing monetary policy, suggesting a potential 50 basis point rate cut. However, there was consensus that this did not commit the Fed to a specific future rate reduction trajectory. Officials noted that any rate cut would align with recent developments in inflation and the labor market.

Market expectations are currently leaning towards a 25 basis point rate cut by the Federal Reserve during its meeting on November 7, especially after the stronger-than-expected jobs report in September. Federal Reserve Chair Jerome Powell reiterated a data-dependent approach to future rate decisions, hinting that the pace of rate reductions may slow.

Dallas Federal Reserve Bank President Lorie Logan supported the recent significant interest rate cut but advocated for smaller reductions moving forward due to ongoing inflation risks and economic uncertainties. Similarly, Federal Reserve Vice Chair Philip Jefferson emphasized that the half-point rate cut was aimed at sustaining a robust labor market amid declining inflation.

In Europe, the European Central Bank (ECB) has taken a more cautious stance due to inflationary pressures and economic concerns. ECB President Christine Lagarde highlighted that while inflation remains high in the Eurozone, the easing of restrictive monetary policies could stimulate growth. The ECB aims to achieve its 2% inflation target by 2025.

ECB board member Yannis Stournaras expressed support for two interest rate cuts this year and anticipates further easing in 2025. Francois Villeroy also indicated a high likelihood of a rate cut in the upcoming week. However, Peter Kazimir expressed skepticism about the need for an imminent cut, stressing the importance of upcoming economic data before the December meeting. Gabriel Makhlouf pointed out potential inflation risks stemming from strong wage growth and persistent service inflation, despite expectations for inflation to meet the target by late next year.

Recent data revealed that Eurozone inflation, measured by the Harmonized Index of Consumer Prices (HICP), fell below the ECB's target in September, reaching 1.8% year-on-year. This decline has strengthened the belief that the ECB may implement further rate cuts in the coming months.

With both the Federal Reserve and the ECB likely to pursue additional rate cuts, the outlook for the EUR/USD pair remains closely linked to macroeconomic trends. Analysts predict that the US economy will continue to outperform its European counterpart, which could further bolster the US Dollar.

In terms of market positioning, speculators have reduced their net long positions in the Euro to the lowest levels since late August, while commercial traders have scaled back their net short positions to a six-week low, accompanied by a slight decrease in open interest, according to the CFTC Positioning Report for the week ending October 1.

Should the EUR/USD continue to decline, it may challenge the October low of 1.0935 (recorded on October 9), which is just above the weekly low of 1.0881 (from August 8). On the upside, the 55-day Simple Moving Average (SMA) at 1.1034 presents a temporary barrier before reaching the 2024 high of 1.1214 (from September 25), followed by the 2023 peak of 1.1275 (from July 18) and the psychological level of 1.1300.

The upward trend for the pair is expected to persist as long as it remains above the critical 200-day SMA at 1.0873. The four-hour chart indicates a strengthening downward trend, with initial support levels at 1.0935, followed by 1.0913, and finally 1.0881. On the upside, initial resistance is seen at 1.0996, ahead of the 55-SMA at 1.1049 and then 1.1082. The relative strength index (RSI) has decreased to approximately 26, indicating bearish momentum.