EUR/USD outlook modestly negative ahead of US CPI, ECB

The EUR/USD failed to hold ono its earlier gains on Monday, turning lower into the close. It has fallen further so far in today’s session with the European Central Bank's rate decision and key US inflation data on the horizon. These events come just ahead of the Federal Reserve's own rate decision, setting the stage for a pivotal couple of weeks. We think that the EUR/USD outlook leans modestly bearish, especially after Monday’s market optimism—fuelled by potential stimulus in China—provided a short-lived relief for risk assets.   

China's export growth slows sharply, imports see steep decline

After announcing plans to adopt a "moderately loose" policy next year, fulling a rally in the likes of the AUD and China-linked stocks, it was China again which caused these moves to unwind. This time, it was data reminding everyone how weak the world’s second largest economy has become, and the need for the government to unleash monetary and fiscal support, just as concerns rise over potential trade tariffs from incoming US President Trump.

China's latest trade figures reveal a sharp slowdown in export growth, rising 6.7% year-on-year to $312.3 billion. This marks a significant drop from October's 12.7% expansion and falls short of the 8.5% growth forecast.  On the import front, the picture is even more concerning. Imports contracted by 3.9%, the steepest decline since September 2023, defying expectations of a modest 0.3% increase.

These figures suggest weakening global demand for Chinese goods, as businesses reduce reliance on China amid concerns over potential trade tariffs from Trump. Domestically, sluggish import activity points to softer demand despite recent economic stimulus efforts.  The data is bad news for Eurozone exports to China, and therefore another negative influence for the euro, even if the country has signalled more stimulus measures are on the way. On that front, investors will now focus on the Central Economic Work Conference, starting Wednesday, for more details on China's fiscal strategies. 

US inflation data to take centre stage from mid-week

Ahead of the ECB’s rate decision, US inflation data will dominate midweek, with CPI due Wednesday and PPI on Thursday. CPI is expected to edge up to 2.7% year-over-year from 2.6%, serving as the final major data release before the Federal Reserve meets.

While the December rate decision likely won’t hinge on this CPI print, an unexpectedly hot number could shape the Fed's stance for early 2025. Following Friday's softer-than-expected NFP report, markets are now pricing in an 87% chance of a December rate cut, up from 70% last week. So far, this hasn’t significantly swayed the EUR/USD direction, but it has kept the upside limited, suggesting investors continue to prefer the dollar because of Trump’s forthcoming policies in 2025 expected to boost spending and cut taxes, thus keeping inflation risks alive. Against this backdrop, we maintain a bearish EUR/USD outlook.

ECB set to cut rates by 25 basis points

The next focal area of the EUR/USD traders will be the European Central Bank’s rate decision on Thursday. Analysts anticipate the ECB will implement a standard 25-basis-point rate cut at this meeting, bringing the deposit rate down to 3.15% from 3.40%. While there were whispers of a larger 50-bps cut, a more gradual approach seems likely, leaving the door open for additional rate reductions in 2025.

Monday’s release of Sentix Investor Confidence data could strengthen the case for more dovish policies. Beyond economic indicators, political uncertainty is also weighing on growth prospects, as budget talks in Berlin and Paris recently collapsed. If the ECB is more dovish than markets anticipate, the EUR/USD outlook could become even more bearish. 

Technical EUR/USD outlook: Key levels to watch

Source: TradingView.com

As per the 4-hour chart, price action continues to look heavy for the EUR/USD. The pair has repeatedly tested the 1.06 resistance zone (1.0595–1.0610) without securing a decisive break above it. A break above this range could trigger a short-squeeze rally toward 1.0700, with further targets around 1.0775/80. For now, however, the bulls remain on standby without a clear reversal signal. 

In fact, the downside risks are still greater and if the bullish trend line breaks, then that could put the bulls in a spot of bother. One particular area to watch is the 1.0500 support zone, which remains critical. A break below there could resume the bearish trend that began in September. For me the trigger is at 1.0472, which was the last low made prior to the most recent up move. A potential break below it could target the liquidity around 1.0333, the November low, followed by psychological levels like 1.0300 and 1.0200, potentially revisiting parity. 

In short…

The EUR/USD outlook stays modestly bearish, with selling pressure likely to return unless the ECB delivers a surprisingly hawkish message or US CPI figures are significantly softer than expected – unlikely on both fronts.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R