EUR/USD falls as ECB prepares to cut interest rates by 25 basis points

• EUR/USD falls to near 1.0530 as investors await key events including US inflation and the ECB policy meeting.
• The ECB is widely expected to reduce its deposit facility rate by 25 basis points to 3% on Thursday.
• Economists expect the US annual core CPI to have grown steadily by 3.3% in November.

EUR/USD falls near 1.0530 in the European session on Tuesday as investors turn cautious ahead of the European Central Bank (ECB) monetary policy meeting, which will be announced on Thursday. Operators have discounted a 25 basis point (bp) reduction in the deposit facility rate to 3%. This would be the ECB’s third consecutive interest rate cut decision.

Market experts assume that a number of factors, including Donald Trump’s victory in the United States (US) presidential election, political turmoil in France and Germany and a sharp slowdown in eurozone business activity forced financial market participants to consider a reduction in interest rates. at Thursday’s political meeting.

The fallout from France’s government and instability in Germany and France could have a direct impact on eurozone economic growth, weighing on price pressures as these two are the largest economies in the trading bloc. The impact of Trump’s tariffs on eurozone inflation when he takes office is still uncertain.

ECB officials are divided over whether the impact of Trump’s tariffs will be inflationary or deflationary on the eurozone economy. A handful of ECB officials assume that Trump’s tariffs will significantly weaken the euro (EUR) against the dollar, a scenario that will make imports more expensive for individuals and increase price pressures. Conversely, some officials forecast risks that inflation will fall short of the bank’s target as higher tariffs will hit the eurozone’s export sector.

Daily Market Factors Summary: EUR/USD Falls Ahead of US Inflation

• EUR/USD falls as the US dollar (USD) rises, and investors await the release of US consumer price index (CPI) data for November, scheduled for Wednesday. The inflation report is expected to show that the annual headline CPI rose at a faster pace of 2.7% from the previous release of 2.6%. The core CPI – which excludes volatile food and energy prices – is expected to rise steadily by 3.3%.
• Inflation data is less likely to influence the Federal Reserve’s (Fed) interest rate expectations for the December 18 monetary policy meeting unless the data deviates significantly from expectations.
• According to the CME FedWatch tool, the probability that the Federal Reserve will reduce interest rates by 25 basis points, to 4.25%-4.50%, is almost 90%. Macquire analysts agree with market expectations for Fed rate cuts next week, but expect the central bank to offer slightly dovish guidance on interest rates.
• “The recent slowdown in the pace of US disinflation, a lower unemployment rate than the Federal Reserve projected in September and the exuberance of US financial markets are contributing to this tougher stance,” analysts at Macquarie.

Technical analysis: EUR/USD faces pressure near 20-day EMA

EUR/USD teeters above the psychological figure of 1.0500. The outlook for the major currency pair remains bearish as the 20-day EMA near 1.0573 acts as key resistance for Euro (EUR) bulls.

The 14-day Relative Strength Index (RSI) recovered after conditions turned oversold and rose above 40.00, suggesting that the bearish momentum has faded. However, the pair’s broader downtrend does not appear to be over yet.

Looking down, the Nov 22 low of 1.0330 will be key support. On the other hand, the 50-day EMA near 1.0700 will be the key barrier for the euro bulls.