EUR/USD remains subdued around 1.0300 ahead of preliminary German inflation

• EUR/USD could decline to parity due to the divergent monetary policy outlooks between the Fed and the ECB.
• Markets price in a 113 basis point reduction in ECB interest rates for this year.
• The US Federal Reserve is expected to pause its easing cycle during the January meeting.

EUR/USD edges lower after registering gains in the previous session, trading around 1.0300 during the Asian hours on Monday. Traders are expected to closely monitor the HCOB Composite Purchasing Managers’ Index (PMI) for the Eurozone and the preliminary Consumer Price Index (CPI) data for Germany, both of which are scheduled for release later in the day.

The EUR/USD pair faces headwinds as market analysts anticipate further declines, potentially reaching parity, driven by diverging monetary policy outlooks between the Federal Reserve (Fed) and the European Central Bank (ECB).

In the Eurozone, ECB policymakers favor continuing the current pace of monetary easing. Markets have already priced in a 113 basis point (bps) reduction in ECB interest rates for this year, implying at least four 25 bps rate cuts. This outlook reflects growing concerns over the Eurozone's inflation falling short of the ECB's 2% target.

On Thursday, ECB Governing Council member and Bank of Greece Governor Yannis Stournaras stated in an interview with Skai Radio that the central bank’s base interest rates should decline to “around 2%” by the “autumn of this year.” This suggests that the ECB will likely reduce its Deposit Facility rate at each of its next four policy meetings.

In contrast, the US Federal Reserve is expected to pause its easing cycle at the January meeting, following three consecutive rate cuts. According to the latest dot plot in the Fed’s Summary of Economic Projections, policymakers anticipate the Federal Funds Rate reaching 3.9% by the end of the year, indicating expectations for just two rate cuts in 2025.

Fed officials have also signaled a more cautious approach to rate reductions in 2025. On Friday, Richmond Fed President Thomas Barkin highlighted that the benchmark policy rate should remain restrictive until there is greater confidence that inflation will return to the 2% target. Similarly, Fed Governor Adriana Kugler and San Francisco Fed President Mary Daly underscored the challenging balancing act facing US central bankers as they aim to slow the pace of monetary easing this year.