EUR/USD: economic and monetary divergence is here

A Fed forced to be patient in its rate cut process, an ECB on the other side that is encouraged to do so in light of the observed economic decoupling, this is in essence the framework that defines the downward trend of the EUR/USD. A trend that was further confirmed yesterday with the US job figures.

In terms of stats, traders focused on indicators on private employment in the US, weekly unemployment benefit registrations (200k) and a survey by the private firm ADP. The private sector created 123,000 jobs in December, which is slightly less than expected. Enough to augur a good federal employment report (NFP for Non Farm Payrolls) on Friday.

Published earlier in the week, "the price component of the ISM Services, which rebounds to its highest level since February 2023 (64.5 vs 58.1 the previous month), is not good news for the Federal Reserve and its chairman Jerome Powell who had already warned in December that a continued slowdown in inflation towards the target was the necessary condition for further rate cuts. Knowing that core PCE inflation, in annual data, has not made any further progress towards the target for two quarters...", warns Alex Baradez (IG France).

"The rebound in the number of available jobs (JOLTS figure) will also push the Fed to be patient because it dismisses possible fears related to the labor market, the Fed's other mandate."

Anything that "will push the Fed to be patient" will be likely to anticipate a 50, or even only 25 basis points cut in the Fed Funds over the whole of 2025, and therefore increase the potential return on the dollar against the euro. Currency traders will have valuable benchmarks on the issue at 20:00 (EU time) with the publication of the traditional Minutes, a chronological report of the discussions of the last FOMC.

As a reminder, this meeting of the Fed's Monetary Policy Committee ended unsurprisingly on 19/12 with a 25 basis point cut in the Fed Funds return.

But the powerful central bank also published an update of its economic projections, highlighting the great strength of the labor market. The Fed suggests that it could only lower rates by 50 basis points cumulatively, over the whole of next year.

The Fed has therefore adopted a rather offensive tone, in particular due to the still chronic tensions on the employment market. As it does every quarter, it published a document eagerly awaited by the markets: the famous dot plots. This dot plot shows that the median anticipation of Fed members for 2025 only incorporates 50 basis points (0.5 percentage points) of reductions in key rates. However, in the previous dot plots, in September, members anticipated a rate reduction of 100 basis points in 2025.

Therefore, a decoupling will take place between policies and therefore monetary trajectories on both sides of the Atlantic. "While two weeks ago, without saying a word, the ECB had undertaken a "dovish" turn at its last monetary policy meeting of the year by indicating that restrictive key rates were no longer necessary, the members of the Fed seem, for their part, to be following a completely different path. For those who were expecting a Christmas present from Jerome Powell, you will have to come back...", says Thomas Giudici, head of bond management at Auris Gestion.

No major American economic statistics are on the agenda today, and for good reason it is a day of national mourning in the US. Wall Street will remain closed in tribute to President J Carter, who died in December at the age of 100.

Relatively good news to report on the German trade surplus for the month of November, which exceeded the target by flirting with 20 billion euros.

Right now, the EUR/USD is trading at $1.0299.

KEY CHART ELEMENTS
The reaction movement at the end of last week, encouraged on Monday by press information denied by Donald Trump, is already running out of steam.

This surge is not likely to thwart the underlying bearish bias, but sends a legitimate message of protest. The 50-day moving average (in orange) continues to constitute a solid technical and graphic barrier.

Once perfect parity is reached, an energetic buying reaction of protest could take place.