As the European Central Bank (ECB) continues its aggressive rate-cutting cycle and the Federal Reserve adopts a slower approach to monetary easing, the EUR/USD is trading near 1.04. With Donald Trump poised to return to the White House, the outlook for the euro against the dollar remains bearish, raising the possibility of EUR/USD testing parity in the first half of 2025.
Dovish ECB Policies Amid Weak Growth and Political Instability
The ECB has been at the forefront of monetary easing, cutting rates by 25 basis points at four consecutive meetings this year. Inflation appears under control, but economic growth remains sluggish, with the likelihood of a recession increasing. Consumer spending is expected to remain subdued into 2025, further weighing on the eurozone’s economic prospects.
Adding to the challenges is political uncertainty. Germany is set for a snap election in February, and France is grappling with instability following the collapse of Michel Barnier’s government. These factors could add pressure to the euro in the coming months.
Trump’s Policies and USD Strength
The US dollar is trading at a two-year high, buoyed by Trump’s election victory. His proposed policies, including tax cuts and tariffs on foreign goods, are expected to be inflationary, further supporting the USD. These measures coincide with solid economic performance in the US, characterized by resilient growth and strong employment levels.
The Federal Reserve has cut rates three times this year but signaled a slower pace of easing for 2025. With only two rate cuts projected, alongside an upward revision of the inflation outlook, the Fed’s stance contrasts sharply with the ECB’s dovish policies, lending further strength to the dollar.
Diverging Central Bank Policies
The divergence between the Fed and the ECB is stark. While the Fed anticipates modest rate cuts and stronger growth, the ECB may need to ease policy further in response to sluggish economic conditions. Additionally, potential trade tariffs on European goods under Trump’s administration could exacerbate the eurozone’s economic slowdown, amplifying the need for aggressive ECB rate cuts. This dynamic increases downward pressure on EUR/USD, making parity a more plausible scenario.
Technical Outlook for EUR/USD
On the weekly chart, EUR/USD has retreated significantly from its 1.12 high earlier in 2024, falling to support at 1.0330. Despite a brief recovery, the pair failed to reclaim the 1.0630 resistance level before resuming its downward trajectory.
Key technical levels suggest a bearish bias. Sellers, supported by a rejection at 1.0630 and an RSI below 50, may drive the pair below 1.0330, targeting 1.02 and potentially parity. For buyers to regain control, the pair would need to break above 1.0630 and establish a higher high, signaling a potential reversal in the downtrend.
Outlook for 2025
The EUR/USD remains under pressure as the year ends, with economic and political factors aligning to favor dollar strength. Unless the eurozone experiences a significant improvement in growth or a shift in monetary policy, the pair appears set to test parity in 2025. Traders will closely monitor central bank actions and geopolitical developments to assess the pair’s trajectory in the months ahead.
