EUR/USD: Euro Weakens as the US Dollar Gains Strength

EUR/USD: Euro Weakens as the US Dollar Gains Strength

The EUR/USD pair continued to decline last week, losing 2.8%. This marks another week of euro weakness, driven by poor economic data from the eurozone and strong US indicators that underscore the resilience of the American economy and reduce expectations for Federal Reserve rate cuts.

Strong US Data Bolsters the Dollar

Key economic data from the US reinforced the dollar’s strength, reflecting the underlying robustness of its economy:

- Initial Jobless Claims (Nov. 16): Reported at 213K, outperforming the 220K forecast, indicating a stable US labor market.
- S&P Global Services PMI Flash (Nov.): Came in at 57.0, significantly above the 55.2 expectation, highlighting strong activity in the US services sector.

These figures diminish the likelihood of imminent rate cuts by the Federal Reserve, maintaining the dollar’s attractiveness to investors.

Weak Eurozone Data Pressures the Euro

On the other hand, disappointing data from the eurozone added considerable pressure on the euro:

- HCOB Composite PMI Flash (Nov.): Dropped to 48.1 (below the 50 threshold indicating contraction), missing the forecast of 50.
- HCOB Manufacturing PMI Flash (Nov.): Fell to 45.2, underperforming the expected 46.
- HCOB Services PMI Flash (Nov.): Declined to 49.2, well below the 51.6 forecast.

The eurozone’s sluggish growth, coupled with inflation stabilizing around 2%, makes a strong case for the European Central Bank (ECB) to accelerate rate cuts. With eurozone rates at 3.4% compared to 4.75% in the US, the dollar’s yield advantage makes it more appealing to investors.

Policy Divergence and Trade Risks

The divergence in monetary policy between the US and the eurozone is a significant driver of EUR/USD’s weakness. While the ECB seems poised to continue cutting rates, the Federal Reserve may slow its actions or even pause. Further boosting the dollar is the potential for future President Donald Trump’s proposed tariffs on imported goods, which could strengthen the US economy and delay rate cuts.

Seasonality: A Possible Lifeline for EUR/USD

Despite the euro’s bearish outlook, seasonality could offer some support to EUR/USD. Historically, December has often been a favorable month for the pair, which might provide temporary relief for the euro in the coming weeks.


Conclusion

EUR/USD remains under significant pressure due to weak eurozone data, monetary policy divergence, and the dollar’s relative strength. Unless there’s a major shift in economic dynamics or central bank decisions, the euro is likely to stay on the defensive.

Will seasonal trends be enough to support the euro, or will the downward trajectory continue? Share your thoughts in the comments!