Weekly Eur/USD Outlook, November 25, 2024 – Dollar Strengthens as Geopolitical Tensions Weigh on Euro

• The U.S. is increasingly viewed by markets as a safe haven amid heightened tensions with Russia. Expectations of aggressive rate cuts by the Federal Reserve in the coming months are fading.
• Europe is grappling with an economic slowdown and border conflicts, weighing down the euro and indirectly fueling inflation risks. The ECB is expected to implement a 50 basis point rate cut in December.
• The EUR/USD exchange rate continues its downward trajectory, breaching the 1.05 support level in a firmly bearish trend favoring the dollar.

Geopolitical Tensions and Central Bank Divergences Shape Dollar and Euro Dynamics

Geopolitical tensions between Russia and the West are escalating as the U.S. and European nations authorize Ukraine to use supplied weapons within Russian territory. Ukraine’s military retreat has prompted drastic measures, which could be rescinded in January with Donald Trump’s inauguration as U.S. president. This move, however, has significantly heightened the intensity of the conflict.

In this volatile environment, markets are identifying clear winners. Bitcoin, now consistently valued around $100,000, has emerged as a standout, with investors favoring it over traditional safe-haven assets like gold. The dollar, meanwhile, remains a market favorite due to its status as a safe-haven currency during geopolitical crises and the renewed attractiveness of U.S. Treasury yields.

The Federal Reserve’s evolving stance on interest rates has further bolstered the dollar. Despite inflation’s stubborn resistance to dipping below 3%, Fed Chair Jerome Powell hinted that rate cuts might be nearing an end. This has fueled speculation that December could see the final 25 basis point reduction in this cycle.

Conversely, dovish comments from Fabio Panetta, Governor of the Bank of Italy and ECB board member, signal growing dissatisfaction with the ECB’s restrictive monetary policy. Panetta has argued that such measures are unwarranted given the current inflation and growth dynamics. His remarks have added downward pressure to EUR/USD, which has broken below the 1.05 support level.

Meanwhile, the Bank of England offers a stark contrast. Governor Andrew Bailey has hinted that the central bank may pause rate cuts at its December 19 meeting, providing some stability to the pound.

Europe finds itself squeezed between stagnation—exemplified by Germany’s recession—and declining inflation. The euro remains weak, exacerbating the risk of another inflation surge driven by border conflicts. November’s composite PMI for the Eurozone fell below the 50-point threshold, with notable weaknesses in France and Germany, both grappling with political instability.

Technical Analysis: Persistent Bearish Signals Point to Continued EUR/USD Decline

The EUR/USD charts underscore the euro’s vulnerability. On a monthly scale, the pair’s RSI (10-period), often a signal for oversold conditions, has not yet dropped below the critical 30-point level. This suggests the euro’s downward momentum could persist into late 2024.

Another bearish signal comes from the ADX, an indicator of trend strength, which is currently above 50. This reading underscores the dominance of bearish momentum. Historically, ADX levels this high have signaled strong trends—whether bullish or bearish—that tend to persist. In both 2020 and 2022, elevated ADX levels accompanied bullish trends that continued despite a moderating slope. Applying this pattern to today’s bearish EUR/USD environment suggests parity is not far-fetched, although achieving it could take several months.

With both technical indicators and broader macroeconomic forces aligned against the euro, the bearish trend shows no signs of exhaustion. Investors should brace for continued volatility and monitor key levels closely as 2024 draws to a close.