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EUR/USD slides below the psychological resistance of 1.0500 on Tuesday. The major currency pair remains fragile as the US Dollar (USD) ticks higher on expectations that the Federal Reserve (Fed) will adopt a slightly hawkish stance after reducing its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% on Wednesday.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks higher to near 107.00.

According to the CME FedWatch tool, traders have priced in a 25 bps interest rate reduction for Wednesday's policy meeting. The data also shows that the Fed is expected to leave interest rates unchanged in the January meeting.

Analysts at Macquarie said that the Fed’s stance could turn “slightly hawkish” from “dovish” on the assumption that 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.”

In Tuesday’s session, investors will focus on the United States (US) monthly Retail Sales data for November, which will be published at 13:30 GMT. Economists estimate that Retail Sales, a key measure of consumer spending, rose by 0.5%, faster than the 0.4% growth in October.

Daily digest market movers: EUR/USD falls while US Dollar remains broadly firm

EUR/USD drops after facing pressure near the key resistance of 1.0530 in Tuesday’s European session. The major currency pair struggles to break above the aforementioned hurdle as its broader outlook of the Euro (EUR) is bearish amid firm expectations that the European Central Bank (ECB) will reduce interest rates at every meeting until June 2025.

The ECB has delivered a 100-bps interest rate reduction this year and is expected to loosen its monetary policy further by a similar margin next year, given that officials are confident about Eurozone inflation returning to the central bank’s target of 2%. Also, ECB policymakers have become worried about growing economic risks due to weak demand and potential tariffs from incoming US President-elect Donald Trump.

After the decision to cut rates on Thursday, a number of ECB officials, including President Christine Lagarde, have agreed to the need for more interest rate cuts. On Monday, Lagarde said that the ECB "will cut rates further if incoming data confirm that disinflation is on track". Lagarde's dovish remarks on the policy outlook were backed by the assumption that "inflation momentum for services has dropped steeply recently."

ECB executive board member Isabel Schnabel, who remains an outspoken hawk, also agreed to a gradual removal of policy restrictions. “Lowering policy rates gradually towards a neutral level is the most appropriate course of action,” Schnabel said at an event in Paris on Monday. However, she warned that the ECB should remain vigilant to any “shocks that have the capacity to destabilize inflation expectations.”

On the political front, the German parliament has passed the no-confidence motion against Chancellor Olaf Scholz’s government, which paved the way for general elections on February 23. According to market expectations, conservative challenger Friedrich Merz would defeat Scholz.

In the European session, the German IFO sentiment surveys for December have shown that Business Climate and Expectations at 84.7 and 84.4, respectively, have come in weaker-than-expected. IFO Current Assessment, an indicator of current conditions and business expectations, surprisingly rose to 85.1 from 84.3 in November.

Technical Analysis: EUR/USD wobbles around 1.0500

EUR/USD trades around the psychological figure of 1.0500, where the pair has been hovering for the last four trading days. The major currency pair faces pressure near the 20-day Exponential Moving Average (EMA), which trades around 1.0540, suggesting that the near-term trend is bearish.

The 14-day Relative Strength Index (RSI) revolves around 40.00. The bearish momentum should trigger if the RSI (14) falls below 40.00.

Looking down, the two-year low of 1.0330 will provide key support. Conversely, the 20-day EMA will be the key barrier for the Euro bulls.

Source: FXSTREET

After the French snap election led to a divided government and an ungovernable France since summer, German politicians gave a no-confidence verdict for the three-way ruling party of Germany, paving the way for an early election in February – about 7 months earlier than scheduled. It means that the Germans will join their French neighbours in political gridlock and uncertainty. The energy crisis and weak global demand explain the most of the German economic misery today. The German economy could’ve grown 5% more over the past five years if it could maintain the pre-pandemic and pre-Ukrainian war trend, according to the latest research. But looking at the DAX index, you wouldn’t guess that the country is experiencing harsh economic meltdown and political problems.

The DAX index retreated yesterday, but from near an ATH level. The political shenanigans didn’t prevent the index from rallying above the 20’000 this month. Its technology heavy weights, like SAP and Siemens, followed their American peers to the north, and somehow hid the misery of the carmakers. But the same cannot be said for France. Their luxury companies could barely provide an umbrella for the rainy French days, as Chinese consumers failed to show up at the rendez-vous. As a result, the Stoxx 600 appears to be peaking ahead of what’s shaping up to be a chaotic Christmas in Europe, while the US continues to revel in the joys of life. There, the atmosphere is completely different.

The Federal Reserve (Fed) is preparing to announce an additional 25bp cut that the country doesn’t necessarily need on top of a 75bp cut delivered since September. The US stock markets are at ATH levels, home prices are at ATH, the US national debt is at ATH, the US CPI is no longer showing progress toward the 2% goal, growth is strong and jobs market looks fine. But the Fed is cutting the rates again.

The S&P500 was up yesterday, not to a record – but near, Nasdaq 100 however advanced to a fresh record high, with Broadcom gaining another 11% yesterday – on top of the 24% added on Friday post-earnings on their juicy forecast for custom AI chips. Nvidia however retreated another 1.68% and has officially stepped into the correction territory – after losing more than 10% since the November peak. The Big Tech buddies’ willingness to build their own chips is probably raising some questions among Nvidia investors as the company made half of its revenue from the Big Tech customers last quarter. Elsewhere, Bitcoin is exploring the moon and abouts on Trump optimism and as Microstrategy – which is a company that made its fortune by buying massive amounts of Bitcoin over the past years – is about to make its way to the Nasdaq 100 in December 23rd. Last week, the company sold around $1.5bn of shares to buy that amount of Bitcoin. It’s as if Bitcoin was joining Nasdaq.

Anyway, it’s all very much great, though there are rising worries about the possibility that we might be seeing a bubble in the US markets. The S&P500 hasn’t deviated from its long-term trend this widely since the dot-com bubble. But a bubble is not a bubble until it bursts. For now, Trump and Powell are giving investors all the support and the money in the world to stick with their positions.

On a side note: the big banks’ dollar expectations are rather soft. Société Générale sees the US dollar weaken 7% against the euro next year, pointing at the ballooning US budget deficit. The reality is that, we’ve been hearing about the US budget deficit for years, and yet…

In the FX, the US dollar index consolidates slightly lower than the November peak into the Fed decision, the EURUSD is waiting for a fresh direction around the 1.05 psychological mark. Released yesterday, the Eurozone December PMI numbers showed further weakness in German and French manufacturing, while activity in services looked better – certainly due to some Xmas magic. But all in all, if the Fed sounds reasonably less dovish about its policy, the EURUSD could extend losses below the 1.05 mark. Elsewhere, the USDJPY advanced to 154.50 yesterday on rising bets that the Bank of Japan (BoJ) will sit still and intervene with intervention threat. Swaps give around 20% of a rate hike this week.

Finally, in commodities, US crude kicked off the week on a bearish note, hit by disappointing news and data from China and could well return below its 50-DMA near $70.15pb – on rising global glut concerns, while cocoa futures advanced to a fresh record high on renewed concerns about the unideal weather conditions in West Africa.

USD: Still countering the seasonal trend

Yesterday’s composite PMIs were generally stronger than expected across main developed markets, although there were clear signs of softening in manufacturing on both sides of the Atlantic. The currency market isn’t drawing many conclusions in monetary policy terms and dollar crosses seem to be settling in the latest ranges ahead of the last big week of macro events before the year-end recess.

In the US, we’ll see retail sales for November today, and expectations are for a robust read – which should, however, have little bearing on tomorrow’s FOMC communication, given some volatility and distortion still in the data due to the impact of extreme weather events. Market pricing is firm on a 25bp cut, which is also our call and consensus.

We think something of a wait-and-see approach could dominate today and favour a further consolidation in the dollar’s latest gains. Ultimately, unless the Federal Reserve signals a more dovish path than the market implies (and we don’t think it will), a 2-year USD OIS rate around 4.0% remains the key counter-seasonal factor keeping the dollar from correcting meaningfully in the generally soft month of December.

Elsewhere in North America, Canada has been shaken by the resignation of finance minister Chrystia Freeland due to divergences with PM Justin Trudeau on how to deal with the threat of Trump tariffs. Trudeau has nominated Dominic LeBlanc as a replacement. He was part of the Canadian delegation that visited Mar-a-Lago last month given his latest responsibility for border security.

Turmoil in Canadian politics is adding a reason the bearish side of the loonie, which remains heavily affected by the prospects of North America trade tensions. Should this lead to a collapse of Trudeau’s government and snap elections, expect the anti-tariffs policy to be the key theme of the campaign. Still, now that the news of Freeland's resignation has been absorbed, we are not convinced USD/CAD needs to accelerate much further on the upside unless the Fed surprises markedly on the hawkish side. Both technical and seasonal factors point to the rally being stretched at this point – and we think it could stall after passing 1.430. That said, the outlook for next year remains gloomy for CAD, and chances of a shift to 1.45+ are tangible if Trump goes ahead with 25% tariffs on Canada.

EUR: Fiscal hopes should take time to come to euro's rescue

The eurozone PMI bounced back into expansionary territory (51.4) in December, driven by strong services. The manufacturing picture remains gloomy though, and Germany’s still-soft 47.8 composite PMI is preventing any tentatively positive news to be priced into the euro at this stage.

That might also suggest a higher probability of Germany parties increasing fiscal stimulus promises, after the no confidence vote yesterday officially paved the way for snap elections in two months. However, we sense that it will take markets embedding a more supportive fiscal story into the euro, as uncertainty about bending the strict German fiscal rules remains and we expect large European Central Bank easing to remain centre stage for the currency market.

Today, expect some impact from Germany’s Ifo and ZEW surveys, although the proximity to the FOMC risk events suggests EUR/USD may well remain anchored to 1.0500 today.

GBP: Hot wage data to keep EUR/GBP pressured

UK labour statistics published this morning are generally quite hawkish for Bank of England expectations, and are leading to a stronger GBP. Headline 3M/3M employment slowed only modestly to 173k in October, against expectations for only 5k. That is, however, an unrealiable measure and may be ignored. The same is true for the unemployment rate, which remained at 4.3%.

What is really important for the Bank of England is the surprise acceleration in wages. Both headline weekly earnings and the ex-bonus measure accelerated again above 5.0%. Crucially, this acceleration is all concentrated in the private sector (where wages grew 12% on a month-on-month annualised basis), where pay trends are more intrinsically linked to wider economic trends.

There are still indications that the jobs market market is cooling – e.g., lower vacancies than pre-Covid – but clearly today’s data is offering a reason for hawks to get louder in the MPC.

Ultimately, there is a compelling case for EUR/GBP to stay below 0.830 in the near term, with risks still skewed to the downside as the BoE will highly likely stay on hold this week, highlighting the striking policy divergence with a dovish ECB.

HUF: NBH will try to show the hawkish face again

The Hungarian National Bank is very likely to leave rates unchanged today again at 6.50%, in line with economists' expectations and market pricing. While inflation and GDP have surprised to the downside recently, the central bank continues to focus on FX. EUR/HUF has fallen from its highs around 415 last week, but even current levels in the 408-410 range are not enough reason to believe in sustainable financial market stability. The focus will be mainly on the press conference communication. In November, the main trigger for the FX sell-off was one vote for a rate cut, so that should not be a surprise to markets today.

At the same time, the central bank will present a new forecast. While the GDP outlook should be revised down, inflation may see some upward revisions especially in the longer term. However, we believe the central bank will generally try to confirm the hawkish story today.

The market is still holding the IRS curve up after a selloff  and outpricing almost all monetary policy easing two months ago. Currently, the market expects only two rate cuts in two years and the entire curve is very flat. While rates have indicated some normalisation of levels in recent days, yesterday the curve jumped up again by 10-24bp across the curve amid very low liquidity common for year-end. This suggests that the market may be significantly volatile while still appearing not to have stabilised after moves in previous weeks.

If the central bank delivers a clear hawkish message, we believe this could be positive for the HUF, which is now vulnerable after yesterday's sell-off in the rates market. At the same time, we believe the rates market should start pricing in rate cuts again given the weak economy and inflation below expectations. Moreover, the current finance minister will take over the leadership of the NBH in March next year, which the market sees as a dovish shift by the central bank, and we therefore believe the market will return to dovish pricing sooner or later. The HUF should try to stabilise at stronger levels by the end of the year, but medium-term we remain negative with a move to 420 EUR/HUF over the next year.

EUR/GBP extends its losses for the second successive session, trading around 0.8260 during the early European hours on Tuesday. The EUR/GBP cross faces challenges as the Pound Sterling (GBP) recovers its losses after the release of UK jobs data.

The UK ILO Unemployment Rate stayed unchanged at 4.3% in the three months to October, the data published by the Office for National Statistics (ONS) showed on Tuesday. The reading matched the market estimate of 4.3% in the reported period. Meanwhile, Employment Change reported the number of employed individuals rose by 173,000, against the previous 253,000 increase. Moreover, Claimant Count Change reported 0.3K jobless benefits claims for November, drastically lower than the expected 28.2K.

Traders will shift their focus toward the Consumer Price Index (CPI) inflation figures on Wednesday, ahead of the Bank of England's (BoE) rate decision on Thursday. The BoE is widely expected to maintain interest rates, with an anticipated eight-to-one vote split, as one notably dovish policymaker is likely to support a rate cut.

On Monday, ECB President Christine Lagarde spoke at the Annual Economics Conference, indicating that the ECB is prepared to cut rates further if incoming data confirm that disinflation remains on track. Lagarde also signaled a shift in policy stance, noting that the previous bias toward maintaining "sufficiently restrictive" rates is no longer warranted.

Data showed on Monday that Eurozone PMI figures exceeded expectations in December; however, Services PMI surveys remain in contraction territory amid growing concerns about a deepening economic slowdown in Europe, which continues to weigh on investor and business sentiment. Traders are expected to focus on mid-tier German data, including December's Business Climate and Current Assessment reports from the CESifo Group.

Source: FXSTREET