EUR/USD refreshes two-year low as traders pare Fed dovish bets
- EUR/USD slumps below 1.0200 as the US Dollar remains firm on expectations that the Fed will cut interest rates only once this year.
- Traders pare Fed dovish bets after upbeat US NFP data for December.
- ECB’s Lane supports more rate cuts to ensure the Eurozone doesn’t grow too slowly.
EUR/USD slides to a fresh over two-year low to near 1.0170 at the start of the week. The major currency pair weakens as the US Dollar (USD) performs strongly amid soaring bond yields. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps above 110.00, the highest level seen in over two years. 10-year US Treasury yields jump to a fresh yearly high at around 4.80%
US bond yields rallied amid growing speculation that the current policy-easing cycle by the Federal Reserve (Fed) has paused for now. Fed dovish bets squeezed after the release of the upbeat United States (US) Nonfarm Payrolls (NFP) data for December on Friday. Fresh payrolls were surprisingly higher than November’s reading, and the Unemployment Rate decelerated.
“Given a resilient labor market, we now think the Fed cutting cycle is over,” Bank of America (BofA) said in a note. The BofA added that the economic activity is “robust,” and sees “little reason for additional easing”. The bank also noted that risks to inflation have skewed to the upside.
According to the CME FedWatch tool, the Fed is unlikely to cut interest rates before its June policy meeting.
This week, investors will pay close attention to the US Producer Price Index (PPI) and the Consumer Price Index (CPI) data for December, which will be published on Tuesday and Wednesday, respectively.
Daily digest market movers: EUR/USD declines as ECB officials remain comfortable with dovish prospects
- EUR/USD faces selling pressure due to dismal market sentiment, which has weighed heavily on the Euro (EUR). Investors have become risk-averse amid uncertainty that protectionist policies under US President-elect Donald Trump’s administration will lead to a global trade war, diminishing the appeal of risk-perceived assets.
- Donald Trump is considering a declaration of national economic emergency that will allow him to construct a new tariff plan on legal grounds. In the election campaign, Trump threatened that the European Union (EU) would have to “pay a big price” for not buying “enough American exports”.
- Domestically, firm expectations of more policy-easing from the European Central Bank (ECB) keep the Euro on the back foot. In a “policy dialogue” at the Asian Financial Forum (AFF) 2025 on Monday, ECB Chief Economist Philip Lane said that more interest rate cuts from the central bank are likely as they need to make sure that the economy does not grow “too slowly”. Lane added that the ECB needs to choose the middle path of being “neither too aggressive nor too cautious” this year.
- Also, ECB policymaker and Deputy Governor of the Croatian National Bank Boris Vujčić has commented that he is comfortable with market speculation of more interest rate cuts. However, Boris pushed back expectations of an “acceleration in the current policy-easing pace”. He advocated “gradual interest rate cuts amid uncertainty”.
Technical Analysis: EUR/USD dives below 1.0200
EUR/USD declines to near the key support on the weekly chart, plotted from the September 2022 high of 1.0200. The outlook for the major currency pair is broadly bearish as the 20-week Exponential Moving Average (EMA) at 1.0580 is declining.
The 14-week Relative Strength Index (RSI) slides below 30.00, indicating a strong downside momentum.
Looking down, the pair could find support near the round level of 1.0100. Conversely, the January 6 high of 1.0437 will be the key barrier for the Euro bulls.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
