The EUR/USD pair has extended its downward trend, hitting fresh annual lows near 1.0500 as the Euro continues to weaken against a strengthening US Dollar. The Dollar has been bolstered by strong economic data and market optimism surrounding President-elect Donald Trump’s legislative agenda, which is expected to prioritize tax cuts and higher import tariffs. This policy mix is fueling expectations of increased inflationary pressures, which may constrain the Federal Reserve’s ability to cut rates aggressively.
Key Drivers Behind EUR/USD’s Decline
- US Economic Data and Fed Expectations:
- Initial Jobless Claims for the week ending November 8 fell to 217,000, below forecasts of 223,000, indicating a strong labor market.
- Producer Price Index (PPI) data showed annual headline PPI rising to 2.4% and core PPI to 3.1%, reflecting faster-than-expected inflation growth.
- With the US Dollar Index (DXY) climbing to 106.80, its highest level since early November, the USD benefits from higher inflation data and reduced likelihood of deeper Fed rate cuts.
- Trump’s “Red Sweep” and Economic Policy Impact:
- With Republicans gaining control of both the House and Senate, Trump’s pro-growth policies, including corporate tax cuts and higher import tariffs, are expected to drive US inflation. This could limit the scope of Fed rate cuts, making the Dollar a more attractive currency compared to the Euro.
- A potential increase in tariffs on the Eurozone could hurt its export sector, weaken GDP growth, and put further pressure on the Euro.
- ECB’s Rate Outlook:
- The European Central Bank (ECB) has indicated a dovish stance, with expectations for more rate cuts in the coming years. ECB Governing Council Member Olli Rehn commented that the Deposit Rate could decline to the so-called neutral rate of 2-2.25% in the first half of 2025.
- This dovish approach contrasts with the Fed’s relatively firmer stance, adding to the Euro’s underperformance.
Technical Analysis: Bearish Outlook for EUR/USD
- EMAs and RSI: EUR/USD remains below all major EMAs, with the 14-day Relative Strength Index (RSI) hovering near 30, signaling bearish momentum.
- Support and Resistance Levels: The pair may find support near the October low of 1.0450. On the upside, 1.0700 serves as a key resistance level, which the Euro would need to breach to challenge the prevailing bearish trend.