ECB Cuts Rates Again Amid Weak Growth, Signals Further Easing Ahead

The European Central Bank (ECB) cut interest rates for the fourth time this year, reducing the deposit rate by 25 basis points to 3.0%, while signaling further easing as eurozone growth remains weak and inflation approaches the ECB’s 2% target. Political instability in France and Germany, coupled with the risk of a U.S. trade war under President-elect Trump, has compounded economic challenges, including stagnant productivity and industrial decline. Further reductions are anticipated, possibly bringing rates to a neutral range of 2-2.5% by 2025.

Despite these moves, economic activity remains subdued, with minimal growth and declining investor confidence. Industrial output has stagnated, productivity growth lags behind global peers, and challenges like elevated energy costs and weak demand persist. Projections indicate inflation will return to target by early 2025, but growth forecasts remain modest, with downside risks from geopolitical and domestic uncertainties.

Germany's economy faces a prolonged downturn with flat inflation and minimal growth prospects. Inflation held steady at 2.4% in November, and the economy is expected to contract by 0.2% in 2024, marking a second consecutive year of decline. Structural challenges, weak industrial demand, high energy costs, and reduced exports—especially to China—are compounding the slowdown. The Bundesbank, Ifo Institute, DIW Berlin, and IfW Kiel have all downgraded growth forecasts, warning of stagnation and slow recovery amid geopolitical tensions and trade uncertainties, particularly with the U.S.

Meanwhile, France is experiencing slower but more stable growth. Economic expansion reached 0.4% in Q3, buoyed by the Olympics, but growth is projected to stagnate by Q4. Inflation in France slightly increased to 1.7% in November year-on-year, driven by food prices, while energy costs dropped. Business sentiment shows cautious optimism in services but continued struggles in industry and construction, with firms cutting investments and hiring due to uncertainty in fiscal policies.

The U.S. dollar strengthened, marking its best weekly performance in a month, as markets adjusted expectations for slower Federal Reserve rate cuts in 2025. The Federal Reserve is widely expected to cut rates by 25 basis points at its Dec. 17-18 meeting, bringing the benchmark rate to a range of 4.25%-4.50%.

While markets anticipate this cut, attention has shifted to policymakers' updated projections, which may signal fewer rate cuts in 2025 due to stronger-than-expected economic data, persistent inflation risks, and geopolitical uncertainties. Current projections suggest three rate cuts in 2025, down from earlier expectations of four, with a terminal rate of 3.1%.

Analysts noted signs of easing inflation in November, particularly in shelter costs, but cautioned that inflation remains sticky, and the Fed may revise its growth and inflation forecasts higher. The incoming Trump administration's policies, including potential tariffs and immigration measures, add further uncertainty to the outlook, potentially limiting rate cuts.

Data for Technical Analysis (1H) CFD EUR/USD

Resistance : 1.0521, 1.0523, 1.0527

Support : 1.0513, 1.0511, 1.0507

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.0503 - 1.0513 is touched, but the support at 1.0513 cannot be broken, the TP may be set around 1.0522 and the SL around 1.0498, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0521 - 1.0531, TP may be set around 1.0536 and SL around 1.0508, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0521 - 1.0531 is touched, but the resistance at 1.0521 cannot be broken, the TP may be set around 1.0512 and the SL around 1.0536, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0503 - 1.0513, TP may be set around 1.0498 and SL around 1.0526, or up to the risk appetite.       

Pivot Points Dec 16, 2024 02:02AM GMT