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Over the past two years, the EUR/USD currency pair has traded within a wide yet sideways range, balanced on the one hand by high interest rates in both the Eurozone and the U.S., and on the other by the weakness of the American economy and a recession in Europe.
The pair's most notable movements occurred in the last three months of the year, driven by expectations of Donald Trump's victory in the U.S. presidential race. His economic agenda, which includes tax cuts, increased tariffs, and other protectionist measures to support domestic manufacturing, as well as the stabilization and resurgence of inflation, were key factors strengthening the dollar. This process occurred across all major currencies without exception and continued despite two 0.50% rate cuts.
While the U.S. dollar gained fundamental support, the euro lost ground due to a decline in consumer inflation to the European Central Bank's (ECB) target of 2%, and briefly below it in September. By December, inflation in the Eurozone edged up slightly to 2.2%, still below the U.S. figure of 2.7%. Stabilization of inflation slightly above target in continental Europe continues to suggest further ECB monetary easing, unlike the Federal Reserve (Fed), where further rate cuts are increasingly deemed unlikely.
Recent inflation data from Spain, released just before the new year, fueled expectations of continued gradual ECB rate cuts. Spanish consumer prices rose by 2.8% year-over-year in December, compared to 2.4% in November, exceeding the forecast of 2.6%. This is significant, as Spain is the Eurozone's fourth-largest economy.
This trend reinforces the ECB's cautious approach, which included four 0.25% rate cuts in 2024. In 2025, an additional four cuts are projected, bringing the deposit rate to 2%. Meanwhile, the Fed is expected to cut rates only twice by 0.25% throughout the year. With other major Eurozone economies yet to release data due to the holidays, the Spanish report remains the focal point of the post-holiday week. The euro declined by nearly 6% in 2024 under pressure from diverging monetary policies between the Eurozone and U.S. central banks.
While the ECB continues gradual easing, the Fed has revised its rate-cutting forecasts downward, further strengthening the dollar against the euro. Uncertainty surrounding potential policy changes under President-elect Donald Trump adds additional pressure on the euro's outlook.
If current factors affecting the EUR/USD pair persist—continued U.S. inflation growth, a persistent Eurozone recession, and Trump's implementation of his new economic policy—it is highly likely that the pair will drop to parity at 1.0000 or even lower to levels seen in September 2022 or January 2001.
Daily Forecast:
EUR/USD:The pair dropped on the last trading day of 2024 to our first target of 1.0345. A breach of this level could push it further down to 1.0250 by the end of this week.
EUR/JPY:The pair remains above the support level of 162.40. Breaking this level could lead to further declines toward 160.65 amid expectations of ECB rate cuts this year and potential rate hikes by the Bank of Japan.
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