EUR/USD price recovery stalls amid geopolitical risks and diverging policies
Geopolitical risks keep USD strong, pressuring EUR/USD
EUR/USD has been under pressure in recent days, largely influenced by diverging monetary policies from the European Central Bank (ECB) and the Federal Reserve (Fed). Following the Fed's 25-basis point (bps) rate cut, the pair fell to its lowest point in four years, touching 1.03400 on December 18.
However, a short-lived recovery attempt saw EUR/USD rise to 1.0423 before dipping back to test the 1.0340 support level in Friday's European session. This renewed support level has prompted a sharp rebound, with EUR/USD now nearing 1.04000.
EUR/USD price dynamics (November-December 2024). Source: TradingView.
While the ECB slashed interest rates for the fourth time this year and left the door open to further easing in 2025, the Fed has signaled it would slow the pace of rate cuts next year. This divergence in monetary policy creates a bearish outlook for the euro, which continues to underperform relative to the USD. With these contrasting policy trajectories, EUR/USD’s downside remains the path of least resistance in the short term.
On top of the monetary policy divergence, the Fed's hawkish shift is compounded by geopolitical risks, including concerns over US President-elect Donald Trump's tariff plans and the looming threat of a US government shutdown. These factors weigh on investor sentiment, further bolstering the US Dollar (USD), which remains near a two-year high as tracked by the US Dollar Index (DXY).
EUR/USD price forecast: 1.0340 holds as support amid bearish bias
Despite these headwinds, EUR/USD has seen some recovery, driven by a rise in the Relative Strength Index (RSI) from its oversold condition following Wednesday's dip. The 1.0340 level continues to act as key support, and while the 1.0460 resistance remains intact, the pair has found temporary relief as it edges closer to 1.04000. Traders will be closely monitoring the potential for a breakout above 1.0460, while any dip below 1.0340 would confirm a bearish outlook for EUR/USD in the coming weeks.
The EUR/USD pair remained in consolidation between 1.0535 and 1.0460 over the past six days. The release of the Eurozone’s Final Core CPI y/y at 2.7% indicated that inflation in the region had stabilised at the ECB’s target.
