EUR/USD consolidates in illiquid market amid year-end trading

• EUR/USD trades in a limited range above 1.0400 as volumes are low with investors enjoying holidays as the end of 2024 approaches.
• The Euro is poised to end the year with an almost 5.5% loss against the US Dollar due to the ECB's dovish guidance and the potential trade war with the US.
• This week, US investors will focus on the US ISM Manufacturing PMI data for December.

EUR/USD trades lackluster slightly above 1.0400 due to illiquid trading activity in the European session on Monday. The Euro (EUR) is set to wrap up the calendar year with an almost 5.5% decline against the US Dollar (USD), hit particularly hard during the last three months of 2024 as the European Central Bank (ECB) maintained dovish guidance on interest rates. Additionally, market participants are worried about the Eurozone's economic growth as incoming tariff hikes from United States (US) President-elect Donald Trump will likely jolt its export sector.

The ECB reduced its Deposit Facility rate by 100 basis points (bps) to 3% this year and is expected to lower it to 2%, which policymakers see as a neutral rate, by the end of June 2025. This suggests that the ECB will cut its key borrowing rates by 25 bps at every meeting in the first half of next year.

A slew of ECB policymakers have expressed concerns about the risks of inflation undershooting the central bank's target of 2%, given the political uncertainty in Germany and the potential trade war with the US. ECB officials have expressed opposing views on how the continent should address the US trade situation.

Last week, ECB President Christine Lagarde said in an interview with the Financial Times (FT) that retaliation was "a bad approach" because she thinks that trade restrictions and a tit-for-tat response "is just bad for the global economy at large.".

Contrarily, ECB policymaker and Finnish central bank Governor Olli Rehn said: "Negotiation is preferable, and the EU's negotiating position can be strengthened by demonstrating in advance that it is ready to take countermeasures if the United States threatens Europe with higher tariffs."

On the economic front, investors await preliminary Spain's Harmonized Index of Consumer Prices (HICP) data for December, which will be published at 08:00 GMT.

Daily digest market movers: EUR/USD follows sideways US Dollar

• EUR/USD traces the US Dollar's footprint, which consolidates near a four-day support amid thin volume in year-end trading. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, wobbles around 108.00. The Greenback is poised to end the year close to its highest level of the calendar year.
• Higher Treasury yields have been a key tailwind for the US Dollar. US bond yields have accelerated significantly in the past few months as investors expect incoming policies of higher tariffs and lower taxes under the administration of Trump will boost economic growth and inflation. This scenario would compel the Federal Reserve (Fed) to adopt a hawkish stance on the monetary policy.
• The Fed guided fewer interest rate cuts for 2025 in its latest dot plot as policymakers collectively see Federal Fund rates heading to 3.9% by the end of 2025. After a hawkish cut in December, investment banking firm Goldman Sachs expects the central bank to deliver the next interest rate cut in March. The firm also expects that two more rate cuts will follow in  June and September.
• This week, investors will pay close attention to the US ISM Manufacturing Purchasing Managers' Index (PMI) data for December, which will be released on Friday. The PMI index is expected to edge down to 48.3 from 48.4, suggesting that manufacturing sector output contracted at a slightly faster pace.

Technical Analysis: EUR/USD wobbles around 1.0400

EUR/USD consolidates in a tight range since Monday above the two-year low of 1.0335. The outlook of the major currency pair remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0464 and 1.0588, respectively, are declining. 

The 14-day Relative Strength Index (RSI) oscillates near 40.00. A downside momentum would trigger if it sustains below that level.

Looking down, the pair could decline to near the round-level support of 1.0200 after breaking below the two-year low of 1.0330. Conversely, the 20-day EMA near 1.0500 will be the key barrier for the Euro bulls.