The recent uptick in US inflation data has sparked speculation that the Federal Reserve (Fed) might adopt a less dovish stance in early 2025. This analysis examines the latest economic news and data impacting the US dollar and provides a technical outlook for EUR/USD and GBP/USD currency pairs.
Recent inflation figures have deviated from the broader downward trend, raising questions about a potential shift. While the Consumer Price Index (CPI) has increased in the past two months, it remains below 3% year-over-year, significantly under the Fed’s target. Similarly, core inflation, excluding volatile food and energy prices, aligned with expectations at 3.3% annually on December 11th.
The Fed has consistently emphasized its commitment to avoiding premature rate cuts to prevent a resurgence of inflation. Current market pricing suggests a near-certain probability of a single rate cut on December 18th. However, the Fed’s actions in January remain uncertain, with only about 21% of market participants anticipating another cut on January 29th. A pause in rate cuts would signal a hawkish shift, potentially bolstering the dollar and exerting downward pressure on gold.
Beyond the Fed’s December meeting, market attention is focused on the final Q3 GDP release on December 19th and Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, on December 20th. A surprise in the PCE data could significantly influence expectations for the January meeting. Furthermore, the potential inflationary impact of new tariffs proposed by the incoming Republican administration adds another layer of complexity to the economic outlook.
Euro-Dollar Struggles for Direction
The recent interest rate cut by the European Central Bank (ECB) was widely anticipated, and the subsequent press conference offered no significant new insights. Eurozone inflation has also risen in the past two months but remains below US levels. The interest rate differential between the ECB and the Fed is projected to persist at a minimum of 1% for the foreseeable future.
Following a late-November rebound after testing the $1.04 level, EUR/USD has lacked sustained upward momentum. The pair may consolidate within a range of $1.04 to $1.06. Short-term technical indicators appear neutral, but the prevailing downtrend from October and November could reassert itself depending on market reactions to the Fed’s meeting and upcoming US economic data.
British Pound Weakens on Disappointing Data
Disappointing UK economic data released on December 13th, including contractions in monthly GDP, industrial production, and manufacturing output, weighed on the British pound. Current projections suggest the Bank of England (BoE) will maintain its current interest rate on December 19th and implement only three rate cuts in 2025. This implies the BoE’s policy rate will likely remain at least one step above the Fed’s until mid-2025.
While the market’s negative reaction to the weak UK data might be overdone, considering the relatively stronger fundamentals of GBP/USD compared to EUR/USD, selling pressure persists. A modest price bounce might be necessary before another attempt to test the $1.25 level or lower. Upside potential appears limited, with $1.28 acting as significant resistance. Volatility and trading volume are expected to remain subdued until the central bank meetings, after which a clearer directional trend may emerge.
This material has been prepared by Hyperloop Capital Insights based on information from public sources. Any opinions expressed herein are solely those of Hyperloop Capital Insights and do not constitute investment advice.
