EUR/USD seems vulnerable around 1.0460 area amid divergent ECB-Fed expectations

EUR/USD struggles near a multi-week low and is pressured by a combination of factors.
The ECB’s dovish outlook is seen undermining the shared currency amid a bullish USD.
Bets that the Fed will adopt a cautious stance and rising US bond yields support the buck.

Haresh Menghani FXStreet

The EUR/USD pair remains depressed during the Asian session on Friday and touches a near three-week low, around the 1.0455 area in the last hour. Moreover, the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside and supports prospects for an extension of the recent downtrend.

The shared currency continues to be undermined by the European Central Bank's (ECB) dovish bias and concerns about the faltering Eurozone economy. In fact, the ECB cut interest rates for the fourth time this year on Thursday and left the door open to further easing in 2025. This marks a big divergence in comparison to expectations for a less dovish Federal Reserve (Fed) and validates the negative outlook for the EUR/USD pair.

The release of the US Consumer Price Index (CPI) and the Producer Price Index (PPI) this week indicated that the progress in lowering inflation to the Fed 2% target has virtually stalled. Furthermore, the growing market conviction that US President Donald Trump's expansionary policies will boost inflationary pressures, suggests that the Fed will adopt a more cautious stance on cutting interest rates going forward.

The outlook remains supportive of a further rise in the US Treasury bond yields and assists the US Dollar (USD) to preserve its gains registered over the past week or so, to a fresh monthly peak touched on Thursday. Apart from this, persistent geopolitical risks stemming from the Russia-Ukraine war and Middle East tensions, along with trade war fears, underpin the safe-haven buck and exert downward pressure on the EUR/USD pair.

Traders, however, seem reluctant to place aggressive bets and might opt to move to the sidelines ahead of the crucial two-day FOMC monetary policy meeting next week. The outcome will be looked upon for fresh cues about the Fed's rate-cut path, which, in turn, should determine the near-term trajectory for the Greenback and the EUR/USD pair. Nevertheless, the aforementioned fundamental backdrop seems tilted in favor of bearish traders.

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What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day, according to data from the Bank of International Settlements. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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