The saying "wishing for heaven, but sins won't let you in" aptly describes the EUR/USD situation. Bulls have weathered significant challenges, such as the French government's resignation, the Bundesbank's downward revision of Germany's GDP forecast, and the European Central Bank's rate cuts. However, misfortune seldom comes alone. Moody's downgrade of France's credit rating, a no-confidence motion against Olaf Scholz, and disappointing Eurozone business activity have added further woes.
Amidst this negative news, EUR/USD bulls are trying to find optimism. December's services PMI indices climbed back above the critical 50-mark, Olaf Scholz's approval rating is improving (though he still trails opposition leader Friedrich Merz), and markets might be overestimating the ECB's monetary expansion scale. Yet the truth remains unavoidable – the downtrend in EUR/USD persists and risks accelerating further. Donald Trump's policies could be the next catalyst.
During Trump's first term in office, the Republican president often criticized the Federal Reserve for raising rates while the ECB lowered theirs. In his view, this disadvantaged the U.S. economy, as it pushed EUR/USD higher. The same scenario could play out in 2025. Derivatives markets predict that the gap between the two central bank's key interest rates will widen from 150 to 200–225 basis points, which will pressure the euro and support the U.S. dollar.
Central Bank Rate Differentials
The same applies to economic growth. At the start of January, the U.S. GDP was forecast to grow by a modest 1% in 2024. By year-end, the Atlanta Fed's leading indicator signals an expansion of 3.3% in Q4. The situation in the Eurozone is quite the opposite. Earlier projections suggested that the growth gap between the U.S. and Eurozone would not widen significantly. However, recent November and December business activity data signal otherwise.
The bears' advantages for EUR/USD – namely, the different speeds of the Fed's and ECB's monetary policies, coupled with the divergence in U.S. and Eurozone economic growth – remain intact. While the euro is fighting hard, evidenced by its attempt to cling to support at $1.0455–1.047, the bulls are running out of steam.
Divergence in US and Eurozone Economic Growth
And now, with the FOMC meeting approaching, further challenges loom. While the Fed is likely to cut rates by 25 basis points, forecasts for 2025 borrowing costs will likely increase, giving the U.S. dollar a tailwind.
On the daily chart, EUR/USD consolidates within a downtrend and forms a Broadening Wedge pattern. A rise above fair value at 1.0515 leaves room for bulls to activate the pattern and trigger a correction. However, if this fails, the euro should be sold with targets around $1.0300.
The material has been provided by InstaForex Company - www.instaforex.comRobotFX
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