EUR/USD trades choppy after ECB Lagarde shows concerns over Eurozone economic growth

• EUR/USD slips to near 1.0450 after the ECB’s dovish monetary policy decision and a firmer US Dollar.
• The ECB reduced its key borrowing rates by 25 basis points on Thursday, but a few officials also discussed the possibility of a 50-bps cut.
• Fed officials are expected to deliver slightly hawkish remarks on interest rate guidance on Wednesday.

EUR/USD broadly consolidates near 1.0470 in Friday’s European session, staying under bearish pressure after comments from European Central Bank (ECB) President Christine Lagarde on Thursday indicated that more interest rate cuts are in the pipeline, a scenario that has dampened the Euro’s (EUR) outlook. 

After the ECB opted to reduce its Deposit Facility rate by 25 basis points (bps) to 3%, Christine Lagarde highlighted the deteriorating Eurozone growth outlook amid a slowdown in exports and weak business investment, which points to the need for further policy easing. “Surveys indicate that manufacturing is still contracting and growth in services is slowing,” she said, adding that “firms are holding back their investment spending in the face of weak demand and a highly uncertain outlook.”.

The comments from Lagarde also indicated that a handful of ECB officials supported a larger-than-usual interest rate cut of 50 bps, suggesting that policymakers are worried about faltering economic growth. The new ECB staff projections forecast the Eurozone economy to grow by 0.7% in 2024 and 1.1% in 2025, less than previously expected. 

Christine Lagarde was confident about inflation returning to 2% on a sustained basis. “Our projections are telling us that we will be at 2% target in the course of 2025.” When asked about the impact on inflation from higher import tariffs by the United States (US), Lagarde said that these are “probably net inflationary” in the short term, but that “It is going to depend on the scope of the measures and retaliation that is decided, on the rerouting of trade traffic from other parts of the world”.

Going forward, investors will look to commentaries from ECB officials on the interest rate guidance, given that the blackout period is over.

Daily digest market movers: EUR/USD is weighed down by outperforming US Dollar

• EUR/USD is also beaten by firm US Dollar (USD), which has extended its winning spell for the sixth trading day. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, climbs above 107.00. The Greenback gains on expectations that the Federal Reserve (Fed) could deliver a slightly hawkish interest rate guidance after cutting its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% in the policy meeting on Wednesday.
• According to the CME FedWatch tool, traders have priced in a 25-bps interest rate reduction on Wednesday but are confident about leaving them unchanged at 4.25%-4.50% in the policy meeting in January.
• “The recent slowdown in the pace of US disinflation, a lower Unemployment Rate than what the Fed projected in September, and exuberance in US financial markets are contributing to this more hawkish stance,” analysts at Macquarie said.
• A faster-than-expected acceleration in the United States (US) Producer Price Index (PPI) data for November has also added to evidence that the Fed could turn slightly hawkish on the interest rate outlook. The US PPI report showed that the annual headline and core PPI – which excludes volatile food and energy prices – rose by 3% and 3.4%, respectively.

Technical Analysis: EUR/USD trades below 1.0500

EUR/USD trades below the psychological figure of 1.0500. The major currency pair sold off sharply after a mean-reversion move to near the 20-day Exponential Moving Average (EMA) around 1.0580, which is close to 1.0550 at the press time. 

The 14-day Relative Strength Index (RSI) dives below 40.00, suggesting a resumption of the downside momentum.

Looking down, the two-year low of 1.0330 will be a key support. On the flip side, the 20-day EMA will be the key barrier for the Euro bulls.