10.12.202400:47 Forex Analysis & Reviews: Three Nightmares for the Euro

When all the negative factors are already priced into a currency pair, even bad news fails to reignite a downtrend. Why didn't EUR/USD collapse in response to the November 227,000 increase in U.S. employment? This figure did not alter investor expectations that the Federal Reserve would lower the federal funds rate by 25 basis points in December. The euro wasn't intimidated by the strong U.S. labor market. Is there anything that could push the major currency pair further south?

MUFG identifies three bearish drivers that could eventually push EUR/USD toward parity. The European Central Bank lowers the deposit rate by 50 basis points in December or hints at a more significant cut in the future. The Fed pauses its rate cuts, keeping borrowing costs unchanged at the upcoming FOMC meeting. Finally, Donald Trump intensifies rhetoric on trade tariffs against the EU.

Projected Dynamics of ECB Monetary Expansion

Although investors are nearly certain the deposit rate will drop from 3.25% to 3% at Christine Lagarde and her colleagues' meeting on December 12, the futures market hints at the possibility of a larger move during one of the next four Governing Council meetings. Derivatives have priced in the eurozone's economic weakness, as evidenced by highly disappointing business activity data and falling inflation expectations.

Some ECB officials are seriously concerned about the eurozone returning to deflation—a problem the central bank fought for years using unconventional measures, including QE. To prevent extreme scenarios, it's better to accelerate the monetary easing cycle now. Should this happen, EUR/USD is likely to continue its decline, especially since Bloomberg experts foresee Frankfurt rapidly cutting borrowing costs to 2%. Meanwhile, Washington is expected to act more cautiously.

ECB Rate Dynamics and Forecast

A Fed pause in December is possible but unlikely. The November inflation data is the only significant report left before the FOMC meeting. FOMC officials have repeatedly emphasized that they won't make long-term conclusions based on a single data point. Therefore, the federal funds rate will most likely be reduced from 4.75% to 4.5% by the end of 2024. However, Jerome Powell has recently remarked that the September 50 basis point cut was a lifeline for the labor market. With the labor market now performing well, why lower rates further?

Lastly, the European Union plans to impose fines on U.S. tech companies under the Digital Markets and Digital Services Acts. This could irritate Donald Trump and prompt him to escalate a trade war.

On the daily EUR/USD chart, the bulls attempted to activate the 1-2-3 reversal pattern, but the effort failed. A drop in the pair's rate below the fair value of 1.055 would be a sell signal, while another attempt to breach resistance at 1.061 would justify buying.