The EUR/USD managed to bounce back to the $1.05 area after testing liquidity below this month’s earlier low of 1.0460 this morning, where traders apparently took profit after a 5-day losing run. The EUR/USD outlook remains negative, however, even if ECB President Christine Lagarde was not as dovish as some might have expected given the political and economic situations in the Eurozone. Investors are looking forward to potentially the last important week of the year next week, where the Fed and a few other central banks are set to deliver their rate expectations. The broken 1.0500 handle is now the most important technical level to watch.
Dollar remains largely on the front-foot ahead of FOMC
This week’s US CPI data revealed no unexpected surprises, although PPI came in a bit hotter. Still, traders felt quite confident to cement their expectations for a rate cut at the Federal Reserve’s final meeting of the year on Wednesday of next week. A 25-basis-point reduction is now almost fully priced in, leaving the Fed with little room to deviate without triggering significant market disruption. The key question remains whether the Fed will pause rate cuts in early 2025 or continue with 25-basis-point reductions at upcoming meetings.
Jerome Powell’s comments last month – emphasising that downside risks to the labour market had eased while inflation proved more stubborn than anticipated – have heightened speculation about a possible hawkish cut. So, Powell’s latest comments at the press conference and the Fed’s forward guidance will be crucial i.e., the updates projections on the economy and interest rates are expected to play a pivotal role in shaping market reactions.
For what it is worth, I think we will see a hawkish rate cut. President-elect Trump’s policy agenda – including immigration controls, tariffs, and personal and corporate tax cuts – is likely to prompt the Fed to indicate a more gradual and restrained path of easing through 2025. This should keep the dollar largely supported, keeping the EUR/USD outlook modestly bearish.
PMIs and central bank bonanza could influence EUR/USD outlook
In the week ahead, we will hear from the US Federal Reserve (Wednesday), Bank of England and Bank of Japan (both on Thursday) among others. Ahead of these central bank meetings, there are not many super important macro releases left until the new year. But watch the global PMIs on Monday as they could influence major FX pairs and indices before the focus shifts to rate decisions. With the Eurozone economy struggling, the German and French data will be particularly important for the EUR/USD. On Thursday, the European Central Bank cut rates by 25 basis points, and we saw an immediate positive response in the DAX and, eventually, a negative one in the EUR/USD. To me that suggests traders are not convinced we have seen a EUR/USD bottom yet.
Technical EUR/USD outlook: Key levels to watch
Source: TradingView.com
The EUR/USD remains under pressure, with the focus firmly on its behaviour around the key 1.05 level. The pair has repeatedly struggled to rally decisively from here and has returned to this psychologically significant zone once again. For now, price action remains heavy. A weekly close below 1.05 today would mark a further bearish signal, potentially paving the way for a re-test of the November low at 1.0333, with the possibility of extending lower.
On the other hand, bullish traders will need to wait for a clear signal. The EUR/USD has approached the 1.06 resistance area (1.0595–1.0610) but has yet to break through convincingly. A decisive move above this level could trigger a short-squeeze rally towards 1.0700, with further upside targets near 1.0780.
One alternative bullish scenario to watch for is if the pair breaks below the November low at 1.0333 but quickly reclaims the level, forming a false-break reversal pattern.
In either case, confirmation is essential. For now, my preferred approach remains to look for bearish setups at resistance, particularly near former support zones.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R