EUR/USD Weekly Outlook, January 6, 2025 – Gas Crisis and Interest Rates Impacting the Euro

• The return of Trump to the White House remains the most anticipated event of January, though attention is also focused on the Federal Reserve and Powell’s upcoming statements to gauge whether a prolonged halt in rate cuts is forthcoming.
• Europe continues to struggle on the macroeconomic front, awaiting the ECB’s next move following recent energy price tensions and the depreciation of the euro.
• EUR/USD remains unable to break above 1.05, confirming a structural weakness that is likely to see parity as an intermediate level over the coming months.

Gas Crisis and Interest Rates Weigh on EUR/USD

With the suspension of gas supplies from Russia via Ukrainian territory, tensions over this essential winter commodity have escalated, particularly for parts of Eastern Europe. In addition to price tensions, the effects are also visible on EUR/USD, which maintains an inverse correlation with the natural gas price traded in Amsterdam. We will explore this further later.
Meanwhile, the interest rate spreads between the United States, the United Kingdom, and the eurozone remain wide. Reinforced by the confirmation that interest rates in both countries will not be lowered anytime soon, the U.S. dollar and British pound continue to ride high, putting pressure on a weakening euro.
Only the initial data for January on inflation and growth could ease the grip on the euro, especially if signs of economic slowdown emerge in the U.S.
For now, European PMI indicators have confirmed a further slowdown at the end of 2024, building on the already depressed levels seen in November. These numbers will need to be taken into account at the upcoming Frankfurt meeting at the end of January, where another rate cut is expected.
In contrast, the United States, while awaiting a formal handover at the White House, is looking at recent data that suggests the economy remains resilient, despite the Fed’s cautious stance on future rate cuts. Growth data continues to keep Powell on alert about its impact on consumer prices and wages. However, there is little doubt that Trump may soon make his voice heard following the first signs of economic slowdown in 2025.

Technical Analysis: EUR/USD Faces Key Resistance and Bearish Pressure

The end of 2024 saw only a modest rebound in the EUR/USD exchange rate, confirming the importance of the 1.04-1.05 range as the main resistance and obstacle to a recovery for the euro. EUR/USD remains below this support zone, which had previously supported rebounds for much of 2023 and part of 2024.
At present, the preferred strategy remains short, with a return above the 50-day moving average at 1.065 serving as the first warning sign that the dollar’s strength may be waning.

The price of gas has once again taken center stage after Russia shut off the gas pipelines passing through Ukrainian territory. Gas prices have risen above €50, not far from the highs of October 2023. The graphical analogy with EUR/USD confirms that the exchange rate had already anticipated this phase by rising above the highs from the same period in 2023.
If the euro’s bullish break is confirmed (and currently there is no evidence to suggest otherwise), the price of natural gas will likely break above the €56 resistance within days. The problem for the Eurozone is that this would mark a double bottom, with significant implications for the evolution of gas prices (and thus inflation) in the coming months, forcing the ECB to halt rate cuts to prevent a collapse of the single currency.