The euro extended its decline against the US dollar after the release of US inflation data on Wednesday. The EUR/USD pair fell for the fourth consecutive trading day, dipping below 1.05, its lowest level since 2 December. The euro recovered slightly in early Asian trading on Thursday, with markets awaiting the European Central Bank’s (ECB) interest rate decision later today.
US Inflation Data Fuels Dollar Rally
US headline inflation rose by 2.7% year-over-year in November, up from 2.6% in October, meeting market expectations. Core inflation, excluding food and energy, increased by 0.3% month-over-month and 3.3% year-over-year. These figures solidified expectations of a modest 25-basis-point rate cut by the Federal Reserve in December.
The US dollar strengthened further, putting pressure on the euro and other major currencies. After a brief recovery in late November, the euro resumed its downward trend following strong US non-farm payroll data last Friday. Analysts predict the Fed may pause its easing cycle in 2025, extending the dollar’s rally. Michael Brown, a research analyst at Pepperstone, noted, “Policy normalization in 2025 is likely to proceed at a much slower pace.”
Euro Faces Persistent Challenges
The euro has declined nearly 4% since early November, with global and domestic factors weighing on its performance. Trade tensions, political uncertainties, and weak economic growth in the Eurozone continue to undermine the single currency.
Despite these headwinds, the ECB is expected to proceed with a 25-basis-point rate cut later today, maintaining its gradual approach. Some analysts project the ECB will accelerate its easing cycle in 2025, potentially cutting rates by an additional 1% next year. This would bring the deposit rate to 2%, according to a Reuters consensus.
Germany and France face rising political challenges, further adding to the euro’s vulnerability. German Chancellor Olaf Scholz has called for a confidence vote on 16 December, potentially triggering early federal elections. In France, the government struggles to pass its 2024 budget, threatening efforts to address the country’s deficit.
Bond yields in Germany and France have dropped significantly, reflecting heightened expectations for deeper ECB rate cuts. The yield on Germany’s 10-year bond fell to 2.13%, while France’s equivalent dropped to 2.90%. The spread between the two yields surged to 89 basis points, the highest since 2012, amid concerns about French political instability.
In contrast, the US 10-year bond yield remained steady at 4.29%, attracting investors seeking higher returns. This yield divergence is likely to sustain demand for the US dollar, putting additional pressure on the euro.
