EUR/USD refreshes two-year low as US Dollar extends rally.

EUR/USD declines below a two-year low of 1.0330 as the US Dollar gains further.
The USD gains as the Fed has guided fewer rate cuts in 2025.
Investors expect the ECB to cut interest rates steadily by 25 bps in each meeting till June.

EUR/USD posts a fresh more-than-two-year low below 1.0320 on the first trading day of the year. The major currency pair weakens as the US Dollar (USD) extends its upside, with the Dollar Index (DXY) rising above 108.60 on optimism that the Federal Reserve (Fed) will reduce interest rates less than previously anticipated this year.

The Fed cut its key borrowing rates by 100 basis points (bps) in 2024 as policymakers were more worried about higher risks to employment than upside risks to inflation. However, they have guided fewer interest rate cuts for this year amid an upbeat United States (US) economic outlook. Additionally, a slowdown in the disinflation trend also compelled officials to favor a gradual policy-easing cycle.

The latest dot plot at the Fed’s Summary of Economic Projections showed that policymakers collectively see Federal Fund rates heading to 3.9% by the end of 2025, higher than the 3.4% forecasted in September.

According to the CME FedWatch tool, the central bank is almost certain to keep interest rates unchanged in the range of 4.25%-4.50% in the January meeting.

Going forward, the US Dollar will be guided by the United States (US) ISM Manufacturing Purchasing Managers Index (PMI) data for December, which will be released on Friday. The PMI is expected to tick lower to 48.3 from the prior release of 48.4, suggesting that the manufacturing sector activities contracted at a slightly faster pace.