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EUR/USD gains ground ahead of US PCE inflation.

December 20, 2024

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EUR/USD holds the immediate support of 1.0340, but the Fed’s hawkish cut weights on the pair in the broader term.
Investors await the US PCE inflation data for fresh guidance on the US interest rate outlook.
ECB’s Patsalides pushes back bigger rate cut prospects and supports gradual policy easing.

EUR/USD gains a temporary ground near the yearly low as the Euro (EUR) gets firm footing against the approval of taxation reforms by German lawmakers, which will result in a reduction in annual tax revenue by 14 billion euros. The scenario will leave more funds with households for disposal, which will boost demand and stimulate economic growth. Higher spending will also diminish risks of Eurozone inflation undershooting the European Central Bank’s (ECB) target of 2%, given that Germany is the largest nation in the old continent.

Additionally, ECB policymaker and Governor of Central Bank of Cyprus Christodoulos Patsalides has pushed back expectations of bigger rate cuts for stimulating growth, a move that has also boosted the Euro’s appeal in the near term. “I personally prefer small adjustments in a gradual process as opposed to bigger interest rate cuts,” Patsalides said on the assumption that the uncertainty over inflation has elevated in both directions, Reuters reported.

Patsalides said that he would go for bigger interest rate cuts only if inflation expectations show that price pressures “will remain well below the target for a very long time.”

Currently, traders have priced four more interest rate cuts from the ECB next year, which will come by June 2025. The ECB has also reduced its Deposit Facility rate four times by 100 basis points (bps) to 3% this year.