The EUR/USD pair plunged to 1.0351 with a single-session fall of 1.32%. The instrument recorded its lowest shut in two years. This stoop was triggered by unexpectedly hawkish statements from the Federal Reserve, which made it clear that no price cuts are anticipated in January.
In line with the up to date FOMC forecasts, solely two price cuts are anticipated in 2025, considerably fewer than earlier estimates. This adjustment in expectations led buyers to reassess their positions. In consequence, this entailed a pointy drop in inventory indices, an increase in US Treasury yields, and, consequently, a strengthening of the greenback.
Regardless of being simply six days earlier than Christmas, markets confronted one other disagreeable shock. Below the affect of the Fed’s hawkish assertion, the S&P 500 index tumbled by 2.95%, marking its steepest post-meeting decline since 2001.
The response additionally prolonged to the debt market. Greater yields on US Treasuries in comparison with different international locations present buyers with a further incentive to spend money on the US. The yield on benchmark 10-year Treasury payments jumped by 11.5 foundation factors, surpassing 4.5% for the primary time since Could. Compared, the yield on 10-year German bonds is simply about 2.29%.
In line with strategists, the Fed’s intention to average the tempo of price cuts is bearish for the US greenback as a result of widening short-term rate of interest differentials with the eurozone.
Analysts are intently monitoring modifications within the FOMC’s dot plots, which replicate particular person committee members’ expectations for future rates of interest. The newest snapshot signifies a cumulative price minimize of fifty foundation factors in 2025 (two steps of 25 bps every), twice decrease than the 100 bps forecasted in September and beneath the 75 bps anticipated by market consensus earlier than the replace was launched.
The revised forecasts bolstered the outlook for a better funds price, with the long-term median dot now projected at 3.0%. This implies that the present rate-cutting cycle will finish at a better stage than beforehand anticipated.
On the identical time, financial forecasts have been revised upwards: the annual inflation price for 2025 is now anticipated at 2.5%, up from the sooner estimated 2.1% improve. Most FOMC members consider core inflation will proceed to say no in 2025.
Jerome Powell famous that the newest price minimize was a troublesome choice and confirmed the Fed’s intention to sluggish the tempo of financial coverage easing. He emphasised that earlier than any additional price cuts, the central financial institution expects clearer progress in decreasing inflationary pressures and won’t tolerate inflation persistently above the two% goal.
In consequence, markets are revising their expectations, making ready for a protracted pause within the Fed’s easing cycle. This state of affairs might preserve the US greenback elevated by 2025, additional pressuring the euro. Might parity be on the horizon?
Short-term rebound in EUR/USD
Throughout Thursday’s European session, the EUR/USD pair managed to climb again above the 1.0400 stage, because the bullish momentum of the US greenback barely weakened following Wednesday’s sharp rally.
Nonetheless, basic indicators nonetheless don’t present a foundation for a shift within the total unfavorable pattern. Each short-term and long-term exponential transferring averages (EMAs) reveal the bearish pattern.
The 14-day Relative Power Index (RSI) broke beneath the decrease border of the bearish vary at 20.00 to 40.00, signaling the formation of a brand new downtrend.
From a technical viewpoint, the important thing help stage for the EUR/USD pair might be 1.0200, offered it breaks beneath the two-year low at 1.0330.
Within the case of an upward correction, the closest vital impediment for bulls could be across the 1.0500 zone, the place the 20-day EMA is acknowledged.
