EUR/USD to 1-Year Low as ECB Faces Easing Pressure

The euro has declined over the past couple of weeks as traders factor in the likelihood of further easing from the ECB, sparking speculation of reaching parity with the US dollar.​

Fibre (EUR/USD) Faces Potential Decline

The fibre experienced a significant decline last Thursday, reaching its lowest since October last year after a 6% drop from its peak in September. Slowing economic prospects and the looming threat of a trade war with the US following the election of President Trump weighed on the EUR/USD pair. Investors now expect further easing measures from the shared central bank, potentially weakening the currency further. Analysts speculate whether the pair could lose an additional 5% and return to parity, a situation last witnessed in 2022 when the Federal Reserve was raising rates faster than the ECB.

The market is pricing in a 25 basis point rate cut at the next ECB meeting in December. However, since the US election, the probability of a larger cut has increased to one-in-four, as markets factor in the potential impacts of tariffs. Sluggish growth in Germany is seen as increasing pressure on the ECB to ease monetary policy, especially with headline inflation at the target rate.​ Meanwhile, the US economy is expected to remain relatively stronger, allowing the Fed more flexibility to maintain higher rates. Although the market is still broadly pricing in a quarter-point cut by the Fed, there is rising speculation that it might pause at the next meeting.

EU Inflation Data Expected to Confirm Acceleration

On Tuesday, Eurostat will release the second reading of October inflation figures, which is expected to corroborate the acceleration in prices observed in the preliminary results. Headline inflation is projected to rise to the target rate of 2% from 1.7% in September, slightly exceeding economist expectations. Both economists and the Bank predict inflation will reaccelerate at least through the winter due to higher food and energy prices before subsiding early next year to reach the target rate. The core rate is expected to be confirmed at 2.7%.

Last week, ECB governing council members from northern and southern regions agreed that interest rates must be reduced; the debate now centres around the extent of the cuts. Markets are pricing in a widening gap between the US and euro interest rates, which could exert downward pressure on the euro throughout the remainder of the year. Futures markets are pricing in 150 basis point cuts by the end of 2025, with a heavy weighting at the start of the period, including quarter-point cuts at least in the December and March meetings. Meanwhile, the Fed is only expected to cut 75 basis points over the next year. Unless there is a substantial change in the inflation figures or growth outlook, analysts will likely continue to express concerns that tariffs might contribute to pushing the euro to parity or below.​

EUR/USD At Critical Support

The decline of EUR/USD to 1.05 has formed a critical double-bottom, pending further directional clues. Should bulls breach the 1.0609 resistance, this could lead to a rebound towards the 1.0668 level. However, for a more substantial price range to emerge, the currency pair would need to overtake the 1.0762 resistance and the swing high of 1.0937. Conversely, if the current floor is breached, prices may descend to 1.0370, with a breakdown below 1.0203 opening the door to parity.​

Source: SpreadEX / EURUSD

Key Takeaways

The euro has recently weakened against the US dollar due to expectations of further easing from the ECB, fuelling speculation that the EUR/USD pair could reach parity. Sluggish economic growth in Germany and the potential impact of US tariffs have increased pressure on the ECB to cut, with analysts predicting the bank could cut by 25 basis points in December, with a one-in-four chance of a larger cut. Meanwhile, the relatively stronger US economy allows the Fed more flexibility to maintain higher rates. Eurozone inflation data is expected to confirm an acceleration to the ECB's 2% target rate in October, driven by higher food and energy prices, while core inflation remains at 2.7%. Markets are pricing in a widening interest rate differential between the US and the eurozone, which could continue to weigh on the euro throughout the remainder of the year if inflation meets or misses expectations.