The ECB's impact on EURUSD
The European Central Bank (ECB) arrives at its last meeting of the year in an environment of high global economic uncertainty, driven by geopolitical tensions, slowdown in China and political changes in the United States. In this scenario, the ECB Governing Council faces a critical decision: to cut interest rates by 25 basis points (bps) in December, continuing its gradual tightening cycle initiated in 2024. However, the real dispute lies in the future direction of monetary policy: moving towards an expansionary zone to stimulate the economy or keeping rates at neutral levels to preserve tools against future crises.
A monetary dilemma and its effects on the market
Analysts' consensus is that the ECB will cut the deposit rate to 3%. This cut, the fourth in a row this year, accumulates to a decrease of 100 bp in 2024. In the short term, these decisions are designed to ease financial conditions in the Eurozone, but they generate divided positions within the ECB between “doves” (pro-expansion) and “hawks” (pro-neutrality). The former seek to stimulate the weakened economy, pushing EUR/USD lower due to a less attractive euro against other currencies with higher yields. On the other hand, the “hawks” argue that excessive cuts now may waste room for maneuver in the future. This creates uncertainty in the markets, especially in the FX market, where EUR/USD has shown volatile movements with each ECB announcement.
Implications for EUR/USD
A 25bp cut could put downward pressure on the euro, as looser policy tends to reduce the currency's attractiveness to investors. However, the impact will depend on expectations about future ECB decisions and the signals given in its forward guidance. If the ECB adopts more accommodative language and is open to further cuts, EUR/USD could break key support levels, such as 1.05, approaching multi-month lows.
Conversely, if the ECB indicates that future cuts will be limited, the euro could find support and stabilize against the dollar. This outcome will also depend on the evolution of other global factors, such as US fiscal policy under the Trump administration, which could influence dollar strength.
Impact on financial markets
In the fixed-income market, gradual cuts are steepening yield curves, favoring intermediate maturity bonds. Meanwhile, in equity markets, an expansionary ECB policy tends to support growth, boosting cyclical and export sectors. However, lingering geopolitical tensions and a moderation in economic forecasts (with projected GDP growth for 2024 of only 0.8%) limit optimism.
Looking ahead to 2025
Some relevant European banks expect the ECB to cut rates to 1.5% by the end of 2025, suggesting gradual adjustments of 25 bps at each meeting in the first half of the year, with possible quarterly reductions in the second half of the year. This outlook leaves a window of uncertainty on EURUSD and European markets, which will continue to react to economic data and global dynamics.
Technical Aspect
Currently the EURUSD awaiting news remains above the support zone. Currently if the rate hike forecasts at today's meeting in the afternoon, will have a palliative effect on the devaluation of the currency. Currently trading at 1.05085 in the early morning hours with a slightly bearish pressure zone since the beginning of the session, a change in directionality to the upside could be seen today. Currently the Check Point (POC) is around 1.05726, a price zone where it was trading on the 5th. It would not be unusual for this rate hike to move the euro in the direction of 1.05400 and break the downward pressure initiated yesterday with the US CPI data which was slightly better than expected although year-on-year inflation matched expectations at 2.7%, although market basket inflation was at 3.3%. This caused EURUSD positions to go long by 70-30% yesterday. Such pressure is similarly maintained.
The ECB faces a difficult balancing act between stimulating the weakened economy and preserving its credibility in the face of future economic shocks. Decisions taken in December and throughout 2025 will define not only the course of the euro, but also the stability of the European economic bloc.
Ion Jauregui - ActivTrades Analyst
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The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
A monetary dilemma and its effects on the market
Analysts' consensus is that the ECB will cut the deposit rate to 3%. This cut, the fourth in a row this year, accumulates to a decrease of 100 bp in 2024. In the short term, these decisions are designed to ease financial conditions in the Eurozone, but they generate divided positions within the ECB between “doves” (pro-expansion) and “hawks” (pro-neutrality). The former seek to stimulate the weakened economy, pushing EUR/USD lower due to a less attractive euro against other currencies with higher yields. On the other hand, the “hawks” argue that excessive cuts now may waste room for maneuver in the future. This creates uncertainty in the markets, especially in the FX market, where EUR/USD has shown volatile movements with each ECB announcement.
Implications for EUR/USD
A 25bp cut could put downward pressure on the euro, as looser policy tends to reduce the currency's attractiveness to investors. However, the impact will depend on expectations about future ECB decisions and the signals given in its forward guidance. If the ECB adopts more accommodative language and is open to further cuts, EUR/USD could break key support levels, such as 1.05, approaching multi-month lows.
Conversely, if the ECB indicates that future cuts will be limited, the euro could find support and stabilize against the dollar. This outcome will also depend on the evolution of other global factors, such as US fiscal policy under the Trump administration, which could influence dollar strength.
Impact on financial markets
In the fixed-income market, gradual cuts are steepening yield curves, favoring intermediate maturity bonds. Meanwhile, in equity markets, an expansionary ECB policy tends to support growth, boosting cyclical and export sectors. However, lingering geopolitical tensions and a moderation in economic forecasts (with projected GDP growth for 2024 of only 0.8%) limit optimism.
Looking ahead to 2025
Some relevant European banks expect the ECB to cut rates to 1.5% by the end of 2025, suggesting gradual adjustments of 25 bps at each meeting in the first half of the year, with possible quarterly reductions in the second half of the year. This outlook leaves a window of uncertainty on EURUSD and European markets, which will continue to react to economic data and global dynamics.
Technical Aspect
Currently the EURUSD awaiting news remains above the support zone. Currently if the rate hike forecasts at today's meeting in the afternoon, will have a palliative effect on the devaluation of the currency. Currently trading at 1.05085 in the early morning hours with a slightly bearish pressure zone since the beginning of the session, a change in directionality to the upside could be seen today. Currently the Check Point (POC) is around 1.05726, a price zone where it was trading on the 5th. It would not be unusual for this rate hike to move the euro in the direction of 1.05400 and break the downward pressure initiated yesterday with the US CPI data which was slightly better than expected although year-on-year inflation matched expectations at 2.7%, although market basket inflation was at 3.3%. This caused EURUSD positions to go long by 70-30% yesterday. Such pressure is similarly maintained.
The ECB faces a difficult balancing act between stimulating the weakened economy and preserving its credibility in the face of future economic shocks. Decisions taken in December and throughout 2025 will define not only the course of the euro, but also the stability of the European economic bloc.
Ion Jauregui - ActivTrades Analyst
*******************************************************************************************
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
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