EUR/USD bounces back after soft US PCE inflation data

• EUR/USD advances above 1.0400 as US PCE inflation rose slower than projected in November.
• The outlook of the US Dollar remains firm on the Fed’s hawkish cut.
• ECB’s Patsalides pushes back bigger rate cut prospects and supports gradual policy easing.

EUR/USD rebounds sharply above 1.0400 in Friday’s North American session after posting a fresh three-week low near 1.0340 in Asian trading hours. The major currency pair rebounds as growth in the United States (US) Personal Consumption Expenditures Price Index (PCE) data remains slower than expected in November. The inflation report showed that annual core PCE inflation, the Fed’s preferred inflation measure, rose steadily by 2.8%, slower than estimates of 2.9%. Month-on-month, the underlying inflation grew moderately by 0.1%, against estimates of 0.2% and the prior release of 0.3%.

A slower-than-projected inflation growth has weighed on the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls below 108.00 after posting a fresh two-year high above 108.50 earlier in the day.

Moderate growth in the inflation data is unlikely to impact market expectations that the Federal Reserve (Fed) will leave interest rates unchanged at their current levels in January. On Wednesday, the Fed signaled fewer interest rate cuts for 2025 amid robust growth rate after reducing its key borrowing rates by 25 basis points (bps) to the 4.25%-4.50% range. In the press conference, Fed Chair Jerome Powell said that economic strength gives the central bank the ability to approach rate cuts cautiously.

Meanwhile, better-than-expected Gross Domestic Product (GDP) in the third quarter has cemented hopes of a cautious rate-cut approach by the Fed for the next year. The US Bureau of Economic Analysis (BEA) revised the Q3 GDP growth rate higher to 3.1%. The agency reported previously that the economy expanded by 2.8%.

Daily digest market movers: EUR/USD moves higher as Euro bounces back

• EUR/USD gains a temporary ground near the yearly low as the Euro (EUR) gets firm footing against the approval of taxation reforms by German lawmakers, which will result in a reduction in annual tax revenue by 14 billion euros. The scenario will leave more funds with households for disposal, which will boost demand and stimulate economic growth. Higher spending will also diminish risks of Eurozone inflation undershooting the European Central Bank’s (ECB) target of 2%, given that Germany is the largest nation in the old continent.
• Additionally, ECB policymaker and Governor of Central Bank of Cyprus Christodoulos Patsalides has pushed back expectations of bigger rate cuts for stimulating growth, a move that has also boosted the Euro’s appeal in the near term. "I personally prefer small adjustments in a gradual process as opposed to bigger interest rate cuts," Patsalides said on the assumption that the uncertainty over inflation has elevated in both directions, Reuters reported.
• Patsalides said that he would go for bigger interest rate cuts only if inflation expectations show that price pressures “will remain well below the target for a very long time.”
• Currently, traders have priced four more interest rate cuts from the ECB next year, which will come by June 2025. The ECB has also reduced its Deposit Facility rate four times by 100 basis points (bps) to 3% this year.

Technical Analysis: EUR/USD stays below all short-to-long-term EMAs

EUR/USD holds the key support of 1.0340 in Friday’s European session. However, the outlook of the major currency pair remains strongly bearish as all short-to-long-term Exponential Moving Averages (EMAs) are declining. 

The 14-day Relative Strength Index (RSI) slides into the bearish range of 20.00-40.00, indicating that a fresh downside momentum has been triggered.

Looking down, the pair could decline to near the round-level support of 1.0200 after breaking below the two-year low of 1.0330. Conversely, the 20-day EMA near 1.0500 will be the key barrier for the Euro bulls.