The EUR/USD pair plunged to 1.0351 with a single-session fall of 1.32%. The instrument recorded its lowest close in two years. This slump was triggered by unexpectedly hawkish statements from the Federal Reserve, which made it clear that no rate cuts are anticipated in January.
According to the updated FOMC forecasts, only two rate cuts are expected in 2025, significantly fewer than previous estimates. This adjustment in expectations led investors to reassess their positions. As a result, this entailed a sharp drop in stock indices, a rise in US Treasury yields, and, consequently, a strengthening of the dollar.
Despite being just six days before Christmas, markets faced another unpleasant surprise. Under the influence of the Fed's hawkish statement, the S&P 500 index tumbled by 2.95%, marking its steepest post-meeting decline since 2001.
The reaction also extended to the debt market. Higher yields on US Treasuries compared to other countries provide investors with an additional incentive to invest in the US. The yield on benchmark 10-year Treasury bills jumped by 11.5 basis points, surpassing 4.5% for the first time since May. In comparison, the yield on 10-year German bonds is only about 2.29%.
According to strategists, the Fed's intention to moderate the pace of rate cuts is bearish for the US dollar due to the widening short-term interest rate differentials with the eurozone.
Analysts are closely monitoring changes in the FOMC's dot plots, which reflect individual committee members' expectations for future interest rates. The latest snapshot indicates a cumulative rate cut of 50 basis points in 2025 (two steps of 25 bps each), twice lower than the 100 bps forecasted in September and below the 75 bps expected by market consensus before the update was released.
The revised forecasts reinforced the outlook for a higher funds rate, with the long-term median dot now projected at 3.0%. This suggests that the current rate-cutting cycle will end at a higher level than previously anticipated.
At the same time, economic forecasts were revised upwards: the annual inflation rate for 2025 is now expected at 2.5%, up from the earlier estimated 2.1% increase. Most FOMC members believe core inflation will continue to decline in 2025.
Jerome Powell noted that the latest rate cut was a difficult decision and confirmed the Fed's intention to slow the pace of monetary policy easing. He emphasized that before any further rate cuts, the central bank expects clearer progress in reducing inflationary pressures and will not tolerate inflation persistently above the 2% target.
As a result, markets are revising their expectations, preparing for a prolonged pause in the Fed's easing cycle. This scenario could keep the US dollar elevated through 2025, further pressuring the euro. Could parity be on the horizon?
Temporary rebound in EUR/USD
During Thursday's European session, the EUR/USD pair managed to climb back above the 1.0400 level, as the bullish momentum of the US dollar slightly weakened following Wednesday's sharp rally.
However, fundamental signals still do not provide a basis for a shift in the overall negative trend. Both short-term and long-term exponential moving averages (EMAs) reveal the bearish trend.
The 14-day Relative Strength Index (RSI) broke below the lower border of the bearish range at 20.00 to 40.00, signaling the formation of a new downtrend.
From a technical viewpoint, the key support level for the EUR/USD pair could be 1.0200, provided it breaks below the two-year low at 1.0330.
In the case of an upward correction, the nearest significant obstacle for bulls would be around the 1.0500 zone, where the 20-day EMA is recognized.