The euro further declined against the US dollar following the release of US inflation data on Wednesday. Markets will be closely watching the upcoming ECB decision today.
The euro continued to weaken against the US dollar following the US CPI data on Wednesday. The pair of EUR/USD fell for the fourth straight trading day to just under 1.05, the lowest since 2 December. However, the single currency rebounded slightly in the early Asian session on Thursday ahead of the European Central Bank (ECB)’s rate decision later today.
US inflation sticks
US headline inflation rose by 2.7% year-over-year in November, up from 2.6% in the previous month. Meanwhile, core inflation, which excludes volatile food and energy prices, rose by 0.3% month-over-month and by 3.3% year-over-year. Both data were in line with consensus estimates, reinforcing expectations for the Fed to implement the third rate cut in December, though the cut would stay modest at 25 basis points.
The US dollar strengthened further following the data, exerting pressure on other currencies including the euro. The euro steadied against the USD in late November after tumbling to a one-year low. However, the dollar’s strength returned following the stronger-than-expected US non-farm payroll last Friday, upending the rebounding trend in the euro.
Additionally, Trump’s presidency is likely to raise pressure on inflation in the US and slow the pace of rate cuts in 2025. Should the Fed pause its easing cycle, the dollar may extend its rally. Michael Brown, a senior research analyst at Pepperstone, wrote in a note: “The pace of policy normalisation is likely to be much slower in 2025.”
Euro’s weakness likely to persist in 2025
Looking ahead, the euro faces greater downside risks than upside potential. The euro has fallen by nearly 4% since early November. Globally, Trump’s tariff threats have weighed on the euro. Domestically, political uncertainties and weak economic growth continue to undermine the Eurozone’s competitiveness.
Despite these challenges, the ECB is likely to keep its gradual pace on rate cuts, with markets expecting a 25 basis-point reduction later today. Some analysts believe the bank will have to accelerate its easing cycle in 2025. Accroding to a consensus by Reuters, the bank is expected to cut the interest rates by another 1% in the new year, bringing the deposit rates to 2%.
Both Germany and France are grappling with political uncertainties due to the surging power of the right-wing parties. In Germany, Chancellor Olaf Scholz has requested a confident vote in parliament, scheduled for 16 December, which could potentially lead to an early federal election next year. In France, the government is facing difficulties securing parliamentary passage for the new year’s budget on 16 December, which may impede efforts to reduce the country’s deficit.
The government bond yields of Germany and France have experienced sharp declines since late November to 2.13% and 2.90% respectively. This reflects heightened expectations for deeper rate cuts by the ECB. The spreads between the 10-year government bond yield of both countries – a key indicator of market sentiment – had surged to 89, the highest since 2012 at a point amid concerns about a potential French government collapse.
In contrast, the yield on the US 10-year government bond steadied at a high level of 4.29%. The divergent movements in bond yields may continue to attract investors seeking a high-yielding US dollar, further weighing on the euro.
