ECB Faces Challenges Amid Economic Weakness, Eyes Further Rate Cuts in 2025

The European Central Bank (ECB) faces tough challenges as it manages a fragile eurozone economy amid internal political instability and external threats, including potential U.S. tariffs under the incoming Trump administration. Economists predict further rate cuts in 2025, with the deposit rate expected to drop to 2.00% by mid-year and possibly to 1.5% by year-end. Despite December 2024 inflation temporarily rising to 2.4%, inflation is projected to stabilize around the ECB’s 2% target.

The eurozone ended 2024 with weak growth and contractions in key sectors like manufacturing. Germany’s economy contracted for the second year, while France reported slowing growth. Consumer sentiment and industrial orders remain low, reflecting economic stagnation. Although household savings rates are high due to past inflation, the ECB expects gradual consumption recovery, supported by real income growth and lower interest rates.

Services inflation, however, remains elevated, complicating the ECB’s efforts to stabilize prices. Chief Economist Philip Lane emphasized the need for balanced rate cuts to avoid recession or delaying disinflation.

Investor confidence is declining, with indicators like Sentix showing pessimism, particularly around Germany’s recession. Eurozone growth is forecasted at just 1.0% in 2025, constrained by weak domestic demand and export challenges. While exports may see a short-term boost before potential U.S. tariffs, long-term recovery remains muted.

The ECB’s easing policy aims to balance growth and inflation control, but risks like rising consumer inflation expectations and a strong dollar increasing import costs persist. Labour markets show resilience with a 6.3% unemployment rate, but slower job growth and weakening demand hint at challenges ahead.

Industrial production in the eurozone rose by 0.2% in November but remains 1.9% lower year-on-year, reflecting prolonged weakness. Retail sales growth of just 0.1% underscores subdued consumer demand as households prioritize savings. High savings rates, at 15.3% in Q3 2024, hinder spending, while the U.S. enjoys stronger consumer-driven growth.

Germany’s recovery is uncertain amid industrial weakness, geopolitical tensions, and inflation. High energy costs and weak demand have left the industrial sector in recession. Retail sales declined unexpectedly in November, while high household savings and labour market concerns weigh on spending.

Germany also faces rising insolvencies, with company closures at their highest since 2009 due to higher interest rates and waning subsidies. Service sector insolvencies, in particular, reflect widespread economic challenges.

U.S. inflation data released recently indicates a mixed economic picture, influencing expectations for Federal Reserve interest rate policies. December's consumer price index (CPI) showed a year-on-year increase of 2.9%, slightly higher than November's 2.7%. Core inflation, which excludes volatile food and energy prices, rose 3.2% annually, slower than anticipated.

Producer prices also rose less than expected in December, with the PPI advancing 0.2% monthly and 3.3% annually, highlighting a deceleration in inflationary pressures. Analysts view the PPI data as a temporary reprieve, with some cautioning that inflation may remain elevated in the near term due to geopolitical and economic uncertainties.

This cooling core inflation, coupled with softer producer price index (PPI) data, has heightened speculation about potential rate cuts by the Federal Reserve, possibly as early as mid-year. Market sentiment reflected this outlook, with U.S. stock futures rising and Treasury yields easing following the reports.

Despite these inflation trends, economic resilience is evident in certain sectors. Small-business confidence surged to its highest level in over six years, driven by post-election optimism and the Republican-led policy outlook. However, consumer sentiment has shown signs of caution, with concerns about rising prices stemming from potential tariffs and policy shifts. The labor market remains robust, with unemployment rates at historic lows, though wage dynamics and energy costs continue to shape economic expectations. This is expected to result in the euro maintaining its current fluctuation range or potentially trending towards the lower bound. It is also likely to continue weakening against the dollar in the medium term due to the divergence in economic momentum between the two regions.

Data for Technical Analysis (30Min) CFD EUR/USD

Resistance : 1.0291, 1.0294, 1.0297

Support : 1.0285, 1.0282, 1.0279

30Min Outlook 

Source: TradingView 

Buy/Long 1 If the support at the price range 1.0279 - 1.0285 is touched, but the support at 1.0285 cannot be broken, the TP may be set around 1.0292 and the SL around 1.0276, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0291 - 1.0297, TP may be set around 1.0307 and SL around 1.0282, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0291 - 1.0297 is touched, but the resistance at 1.0291 cannot be broken, the TP may be set around 1.0283 and the SL around 1.0300, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0279 - 1.0285, TP may be set around 1.0269 and SL around 1.0294, or up to the risk appetite.       

Pivot Points Jan 16, 2025 02:56AM GMT