EUR/USD refreshes two-year low as US Dollar extends rally

• EUR/USD declines below a two-year low of 1.0330 as the US Dollar gains further.
• The USD gains as the Fed has guided fewer rate cuts in 2025.
• Investors expect the ECB to cut interest rates steadily by 25 bps in each meeting till June.

EUR/USD posts a fresh more-than-two-year low below 1.0320 on the first trading day of the year. The major currency pair weakens as the US Dollar (USD) extends its upside, with the Dollar Index (DXY) rising above 108.60 on optimism that the Federal Reserve (Fed) will reduce interest rates less than previously anticipated this year. 

The Fed cut its key borrowing rates by 100 basis points (bps) in 2024 as policymakers were more worried about higher risks to employment than upside risks to inflation. However, they have guided fewer interest rate cuts for this year amid an upbeat United States (US) economic outlook. Additionally, a slowdown in the disinflation trend also compelled officials to favor a gradual policy-easing cycle.

The latest dot plot at the Fed's Summary of Economic Projections showed that policymakers collectively see Federal Fund rates heading to 3.9% by the end of 2025, higher than the 3.4% forecasted in September.

According to the CME FedWatch tool, the central bank is almost certain to keep interest rates unchanged in the range of 4.25%-4.50% in the January meeting.

Going forward, the US Dollar will be guided by the United States (US) ISM Manufacturing Purchasing Managers Index (PMI) data for December, which will be released on Friday. The PMI is expected to tick lower to 48.3 from the prior release of 48.4, suggesting that the manufacturing sector activities contracted at a slightly faster pace.

Daily digest market movers: EUR/USD declines as Euro weakens

• EUR/USD is also under pressure due to the weak Euro’s (EUR) outlook. The shared currency faces selling pressure as the European Central Bank (ECB) is expected to continue its steady rate-cut cycle until June. This suggests that there will be four interest rate cuts, pushing the Deposit Facility rate lower to 2%.
• Market participants expect further policy easing as Eurozone price pressures are on track to return sustainably to the ECB’s target of 2%. 
• Additionally, investors price in a sharp decline in European exports due to higher import tariffs from the US under the administration of incoming President Donald Trump.
• For more cues on inflation, investors await preliminary German and Eurozone Harmonized Index of Consumer Prices (HICP) data for December, which will be released early next week. Investors will pay close attention to the HICP data as it will indicate whether the ECB will continue easing interest rates at a steady pace of 25 basis points (bps) or pivot to a larger-than-usual pace of 50 bps.
• ECB policymaker and Irish central bank chief Gabriel Makhlouf warned in an interview with the Financial Times (FT) on December 23 that some elements of services inflation in the Eurozone were a bit concerning, which underscores the need for “gradual interest rate cuts, rather than big leaps” unless the facts and evidence changed.
• On the economic front, final estimates for HCOB Manufacturing PMI for December showed that factory activities contracted at a slightly faster pace to 45.1 from the preliminary reading of 45.2.

Technical Analysis: EUR/USD breaks below two-year low of 1.0330

EUR/USD drops below the two-year low of 1.0330 in Thursday's European session. The outlook of the major currency pair was already bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0433 and 1.0556, respectively, are declining. 

The 14-day Relative Strength Index (RSI) slides below 40.00, indicating a strong downside momentum.

Looking down, the pair could find support near the round-level support of 1.0200. Conversely, the psychological resistance of 1.0500 will be the key barrier for the Euro bulls.