The euro continued its decline against the US dollar after the release of US inflation data on Wednesday. The EUR/USD pair dropped for the fourth consecutive trading day, reaching its lowest level since 2 December at just under 1.05. Early on Thursday, the euro showed slight recovery in the Asian session ahead of the European Central Bank (ECB)’s interest rate decision later today.
US Inflation Drives Dollar Strength
US headline inflation rose by 2.7% year-over-year in November, up from 2.6% in October, matching market expectations. Core inflation, excluding food and energy, increased by 0.3% month-over-month and 3.3% year-over-year. These figures reinforced expectations of a modest 25 basis-point rate cut by the Federal Reserve in December.
The strong inflation data further boosted the US dollar, pressuring other currencies, including the euro. The euro briefly stabilized in late November after hitting a one-year low but faced renewed downward pressure from robust US non-farm payrolls data last Friday. Analysts suggest Trump’s presidency could intensify inflation in the US, potentially slowing the Fed’s rate cuts in 2025. Michael Brown, a research analyst, noted, “Policy normalization may progress more slowly in 2025 if inflation remains persistent.”
Euro Faces Prolonged Weakness Amid Political and Economic Struggles
The euro has lost nearly 4% since early November and faces greater downside risks in 2025. Global factors, including trade tariff threats from Trump, continue to weigh on the euro, while political uncertainties and weak economic growth erode the Eurozone’s competitiveness.
Despite challenges, markets anticipate the ECB will proceed with a gradual 25 basis-point rate cut today. However, some analysts believe the ECB may need to accelerate its easing cycle in 2025. According to Reuters, the ECB is expected to cut rates by an additional 1% next year, reducing deposit rates to 2%.
Political uncertainties in Germany and France add to the euro’s challenges. In Germany, Chancellor Olaf Scholz faces a confidence vote in parliament on 16 December, which could lead to early elections in 2024. In France, the government struggles to pass its 2024 budget, hindering deficit reduction efforts.
German and French government bond yields have sharply declined since late November, reflecting expectations of deeper ECB rate cuts. The 10-year yield spread between the two countries recently reached 89 basis points, the highest since 2012, amid fears of a French government collapse.
Meanwhile, the US 10-year government bond yield remains steady at 4.29%, attracting investors seeking higher returns. This divergence in bond yields may further strengthen the US dollar, prolonging the euro’s weakness.