Euro consolidates after losing streak amid anticipation of ECB decision

12 Aralık 2024

Written by Samer Hasn, Senior Market Analyst at XS.com

The Euro is rising against the Dollar today by 0.25% after a four-day losing streak while still remaining slightly close to its lowest levels in more than a year.

The Euro’s moves coincide with anticipation of the European Central Bank’s interest rate decision amid expectations of a third consecutive cut. While the focus will be on the press release and speech of the Bank’s Governor Christine Lagarde following the announcement of the decision, the soft tone and the emergence of signals about the continuation of the pace of cuts during the coming year will pressure the single currency to resume its losses.

Today’s news will come amid many negative factors surrounding the Euro. We see weak economic performance in addition to the collapsed sentiment about the future of the Eurozone economies, especially its largest ones. The latest data this week was the Sentix Investor Sentiment figures, which recorded faster-than-expected decline in November, with the report mentioning the lack of optimism about the German economy.

Add to this the turbulent political climate in Germany and France, which is causing uncertainty that is increasing as elections approach. German Chancellor Olaf Scholz called a confidence vote yesterday, which could pave the way for early elections after his coalition collapsed. He is expected to lose this vote, according to Reuters, which will prompt him to ask for the dissolution of parliament.

Aside from that, the continued flow of better-than-expected data from the US economy and labor market, in addition to the acceleration of inflation for the second month in a row, could deepen the euro’s losses. The latest employment and consumer price data have kept concerns about the pace of interest rate cuts next year. The probability of a 25-basis point cut in January is still below 20%, according to the CME FedWatch Tool.

Concerns about the upside risks to inflation among policymakers at the Federal Reserve, with the economy showing strength and the expected trade wars, remain cautious when talking about cutting rates, which keeps hope weak. In contrast, the European Central Bank may not have the flexibility to keep rates steady for long in light of the weak economic performance.

These contrasting narratives of interest rates and economic performance keep the yield gap between US Treasuries and their Eurozone counterparts widening, keeping the pressure on the Euro to fall further. The yield gap between the 10-year Treasury bond and its German counterpart has been rising for the past three sessions this week and is near its highest levels since last April, reaching 2.145% today.