EUR/USD gains ground ahead of Eurozone inflation data
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The EUR/USD pair climbed to a fresh weekly high around 1.0580 during Friday’s European session, continuing its upward momentum as the US Dollar (USD) extended its pullback. Investors are now focused on the upcoming Eurozone Harmonized Index of Consumer Prices (HICP) data for November, which is expected to offer important clues about the European Central Bank's (ECB) policy direction ahead of its December meeting.
Eurozone HICP and ECB Policy Expectations
The preliminary HICP report, set to be released at 10:00 GMT, is expected to show that annual headline HICP inflation has accelerated to 2.3%, up from 2.1% in October. Core HICP inflation, which excludes volatile food and energy prices, is anticipated to rise to 2.8% from 2.7%. This data will be critical in shaping market expectations for the ECB’s next policy move. The ECB has already reduced its Deposit Facility Rate by 75 basis points (bps) this year to 3.25%. Markets are currently pricing in at least a 25 bps rate cut in December, with some speculation about a possible 50 bps cut, given the economic challenges facing key Eurozone economies like Germany and France.
Economic Context: Weaker Data from the Eurozone
Recent data from the Eurozone has pointed to slowing growth, contributing to concerns about the region’s economic outlook. For instance, Germany’s Retail Sales for October contracted by 1.5% month-over-month (MoM), much worse than the forecasted decline of 0.3%. Additionally, political uncertainties in France and Germany could further dampen economic activity and growth prospects. In light of these factors, ECB Governing Council member François Villeroy de Galhau recently suggested that the central bank could consider a larger-than-expected rate cut, depending on how the economic data evolves.
US Dollar Weakness Supports EUR/USD
The US Dollar Index (DXY) has continued its decline below the 106.00 level, pressured by dovish expectations regarding Federal Reserve (Fed) policy and growing optimism over President-elect Donald Trump’s economic agenda. The latest economic data has added to these expectations, particularly the October Core PCE inflation data, which came in at 2.8% year-over-year (YoY), slightly higher than expected. However, the Fed remains cautious about making aggressive rate cuts. Markets are currently pricing in a 66% chance of a 25 bps rate cut in December.
Additionally, Trump’s nominee for Treasury Secretary, Scott Bessent, is expected to focus on gradual tariff strategies while maintaining fiscal discipline, which has reassured financial markets. Meanwhile, the U.S. Thanksgiving holiday has led to lower trading volumes, contributing to subdued demand for the USD.
Technical Outlook: EUR/USD Eyes 1.0600 Resistance
The recent recovery in EUR/USD appears to be a mean-reversion move, with technical indicators showing mixed momentum. Immediate resistance is seen near the 1.0600 level, which coincides with the 20-day Exponential Moving Average (EMA). If the pair manages to break through this level, further upside could face resistance at the 50-day EMA around 1.0747. On the downside, key support is located at the November 22 low of 1.0330.
The 14-day Relative Strength Index (RSI) has rebounded above 40, suggesting that bearish momentum is fading. However, the broader technical outlook remains bearish, as all major EMAs are still sloping downward.
Conclusion
The EUR/USD pair's recent gains are largely driven by USD weakness and growing expectations that the ECB will take action in December. While short-term gains toward the 1.0600 level are possible, the broader downside risks remain due to the Eurozone’s economic vulnerabilities and the Fed’s cautious approach to easing. Traders should closely monitor the upcoming Eurozone inflation data and any shifts in USD dynamics, as these factors will likely influence market sentiment ahead of next week’s busy U.S. economic calendar.
Eurozone HICP and ECB Policy Expectations
The preliminary HICP report, set to be released at 10:00 GMT, is expected to show that annual headline HICP inflation has accelerated to 2.3%, up from 2.1% in October. Core HICP inflation, which excludes volatile food and energy prices, is anticipated to rise to 2.8% from 2.7%. This data will be critical in shaping market expectations for the ECB’s next policy move. The ECB has already reduced its Deposit Facility Rate by 75 basis points (bps) this year to 3.25%. Markets are currently pricing in at least a 25 bps rate cut in December, with some speculation about a possible 50 bps cut, given the economic challenges facing key Eurozone economies like Germany and France.
Economic Context: Weaker Data from the Eurozone
Recent data from the Eurozone has pointed to slowing growth, contributing to concerns about the region’s economic outlook. For instance, Germany’s Retail Sales for October contracted by 1.5% month-over-month (MoM), much worse than the forecasted decline of 0.3%. Additionally, political uncertainties in France and Germany could further dampen economic activity and growth prospects. In light of these factors, ECB Governing Council member François Villeroy de Galhau recently suggested that the central bank could consider a larger-than-expected rate cut, depending on how the economic data evolves.
US Dollar Weakness Supports EUR/USD
The US Dollar Index (DXY) has continued its decline below the 106.00 level, pressured by dovish expectations regarding Federal Reserve (Fed) policy and growing optimism over President-elect Donald Trump’s economic agenda. The latest economic data has added to these expectations, particularly the October Core PCE inflation data, which came in at 2.8% year-over-year (YoY), slightly higher than expected. However, the Fed remains cautious about making aggressive rate cuts. Markets are currently pricing in a 66% chance of a 25 bps rate cut in December.
Additionally, Trump’s nominee for Treasury Secretary, Scott Bessent, is expected to focus on gradual tariff strategies while maintaining fiscal discipline, which has reassured financial markets. Meanwhile, the U.S. Thanksgiving holiday has led to lower trading volumes, contributing to subdued demand for the USD.
Technical Outlook: EUR/USD Eyes 1.0600 Resistance
The recent recovery in EUR/USD appears to be a mean-reversion move, with technical indicators showing mixed momentum. Immediate resistance is seen near the 1.0600 level, which coincides with the 20-day Exponential Moving Average (EMA). If the pair manages to break through this level, further upside could face resistance at the 50-day EMA around 1.0747. On the downside, key support is located at the November 22 low of 1.0330.
The 14-day Relative Strength Index (RSI) has rebounded above 40, suggesting that bearish momentum is fading. However, the broader technical outlook remains bearish, as all major EMAs are still sloping downward.
Conclusion
The EUR/USD pair's recent gains are largely driven by USD weakness and growing expectations that the ECB will take action in December. While short-term gains toward the 1.0600 level are possible, the broader downside risks remain due to the Eurozone’s economic vulnerabilities and the Fed’s cautious approach to easing. Traders should closely monitor the upcoming Eurozone inflation data and any shifts in USD dynamics, as these factors will likely influence market sentiment ahead of next week’s busy U.S. economic calendar.