18.12.202400:25 Forex Analysis & Reviews: The Dollar Divides and Conquers

Better together than alone? The current situation in the eurozone makes one question this. While Germany is sinking, Spain's economy thrives thanks to migration and a post-pandemic tourism boom. The local central bank raised its GDP growth forecasts for 2024 from 2.8% to 3.1% and for 2025 from 2.2% to 2.5%. Madrid is helping to sink Berlin, but will that be enough to save EUR/USD?

Spain GDP Trends and Forecasts

The German IFO Institute report added to investor disappointment following a vote of no confidence in Olaf Scholz's government and the Bundesbank's pessimistic assessment of its economy, which points to a recession. The actual value of business expectations came in lower than any Bloomberg expert forecasts. Germany's GDP is in a freefall. Worse still, Donald Trump's proposed tariffs could push the situation to a critical point. The parity of the euro against the US dollar may not seem surprising.

The eurozone needs saving, and the only logical solution appears to be monetary policy easing. According to Christine Lagarde and Olli Rehn, the path of the key interest rate is evident. However, based on data and deep analysis, the pace and extent of its cuts will be determined at each specific meeting.

German Business Expectations Dynamics (IFO)

Bloomberg experts anticipate a cut in the European Central Bank's deposit rate from 3% to 2% in 2025, while the futures market projects an even lower figure at 1.75%. In contrast, most analysts surveyed by the Financial Times believe the US federal funds rate will end 2025 at 3.5–4.0%. This would widen the gap between US and eurozone borrowing costs from 150 basis points to 200–225 basis points next year. An increase of 100 basis points in 2024 led to a 5% decline in EUR/USD.

In the short term, the fate of the major currency pair will depend on the Federal Reserve's decisions. While a 25-basis point rate cut to 4.5% is expected, the FOMC rate forecasts remain uncertain. Fed officials predicted four rate cuts in September 2025, but now this scenario seems overly aggressive. It is more likely that projections will be revised by 25–50 basis points, strengthening the US dollar against major world currencies.

Thus, the euro is in a difficult spot. Alongside internal negativity, particularly from Germany and France, the regional currency is battling headwinds from the US. So far, it is holding up, but when will these forces finally knock the EUR/USD off its feet?

Technically, the daily chart for the pair shows ongoing consolidation. A breakout above resistance at 1.0615, is required to activate the Broadening Wedge reversal pattern, which currently seems unlikely. However, a drop in EUR/USD below the lower boundary of the fair value range at 1.0480–1.0580 and the local low at 1.0455 could serve as a signal to sell.