EUR/USD: US Dollar Strength, Political Gridlock Set to Keep Pair Under Pressure

Summary:

EUR/USD remains under pressure as a stronger US dollar, fading Fed rate-cut expectations, and US political gridlock weigh on the pair. The ECB is holding steady, and a break below 1.15 risks further downside toward 1.12.

The EUR/USD pair has been moving lower at a steady pace since mid-September, forming part of a broader sideways trend. The US dollar has strengthened, helped by calmer relations between Beijing and Washington and lower expectations of another Fed rate cut in December, which markets had earlier considered likely.

In Europe, the European Central Bank kept interest rates unchanged last week, matching market expectations. The decision was based on inflation staying near the ECB’s target and showing signs of stability in the short to medium term.

Meanwhile, the ongoing US government shutdown has kept economic activity quiet, and we may not get labor market data this week as a result.

Falling Fed Rate Cut Chances in December

Just a few weeks ago, markets were confident that the Fed would cut interest rates by at least 50 basis points before the end of the year, likely spread across the October and December meetings. Now, that outlook has shifted. The odds of a cut and a pause are nearly balanced, with a slight tilt toward a cut. However, recent cautious remarks from Fed officials, combined with the lack of new economic data, suggest they may wait until year-end before making any move.

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The key question now is whether the political deadlock will ease this month, allowing the release of pending macroeconomic data. Based on recent public remarks, that seems unlikely, as both parties continue to trade blame and hold their ground. A more favorable environment for negotiations could emerge after the upcoming local elections in the US. The most closely watched contest is the New York mayoral race, where the Democratic candidate currently holds a lead in the polls.

Is this the End of the Downgrade Cycle in the Eurozone?

With its latest decision and statement, the ECB has signaled that it considers the current level of interest rates suitable for the eurozone’s present economic conditions. Christine Lagarde and her team appear confident that policy settings are aligned with the region’s macroeconomic outlook.

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At the same time, the ECB emphasized that it will keep monitoring incoming data but will avoid reacting to one-off spikes in inflation unless there are clear signs of lasting growth. Markets are also watching whether Germany’s proposed stimulus package goes through, as its scale and design could have a significant impact on the broader European economy.

EUR/USD Struggles to Move Below 1.15

The current decline in EUR/USD has slowed around the 1.15 level, but the overall trend still points downward. If the pair falls below 1.15, sellers will likely aim for the next key support level near 1.1440.

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Breaking through this area could be a clear signal of sellers’ dominance at least in the short term, and if the FED holds off on cuts in December, then the way is open for an attack on levels as low as 1.12.

Source: investing

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