EUR/USD is under pressure as US Dollar clings to gains near two-year high

• EUR/USD trades cautiously near 1.0350 as the US Dollar clings to gains.
• The USD sees more upside as the Fed has guided fewer rate cuts in 2025.
• Investors expect the ECB to cut interest rates steadily by 25 bps in each meeting till June.

EUR/USD trades vulnerable and holds near a more-than-a-month low at around 1.0350 on the first trading day of the year. The major currency pair skates on thin ice as the US Dollar (USD) clings to a more than two-year high, with the Dollar Index (DXY) trading around 108.50 on optimism that the Federal Reserve (Fed) will reduce interest rates less than previously anticipated this year. 

The Fed cut its key borrowing rates by 100 basis points (bps) in 2024 as policymakers were more worried about higher risks to employment than upside risks to inflation. However, they have guided fewer interest rate cuts for this year amid an upbeat United States (US) economic outlook. Additionally, a slowdown in the disinflation trend also compelled officials to favor a gradual policy-easing cycle.

The latest dot plot at the Fed's Summary of Economic Projections showed that policymakers collectively see Federal Fund rates heading to 3.9% by the end of 2025, higher than the 3.4% forecasted in September.

According to the CME FedWatch tool, the central bank is almost certain to keep interest rates unchanged in the range of 4.25%-4.50% in the January meeting.

Going forward, the US Dollar will be guided by the United States (US) ISM Manufacturing Purchasing Managers Index (PMI) data for December, which will be released on Friday. The PMI is expected to tick lower to 48.3 from the prior release of 48.4, suggesting that the manufacturing sector activities contracted at a slightly faster pace.

Daily digest market movers: EUR/USD remains vulnerable amid weak Euro

• EUR/USD is also under pressure due to the weak Euro's (EUR) outlook. The shared currency edges slightly higher on Thursday against the US Dollar. Still, it could face selling pressure as the European Central Bank (ECB) is expected to continue its steady rate-cut cycle until June. This suggests that there will be four interest rate cuts, pushing the Deposit Facility rate lower to 2%.
• Market participants expect further policy easing as Eurozone price pressures are on track to return sustainably to the ECB's target of 2%. 
• Additionally, investors price in a sharp decline in European exports due to higher import tariffs from the US under the administration of incoming President Donald Trump.
• For more cues on inflation, investors await preliminary German and Eurozone Harmonized Index of Consumer Prices (HICP) data for December, which will be released early next week. Investors will pay close attention to the HICP data as it will indicate whether the ECB will continue easing interest rates at a steady pace of 25 basis points (bps) or pivot to a larger-than-usual pace of 50 bps.
• ECB policymaker and Irish central bank chief Gabriel Makhlouf warned in an interview with the Financial Times (FT) on December 23 that some elements of services inflation in the Eurozone were a bit concerning, which underscores the need for "gradual interest rate cuts, rather than big leaps" unless the facts and evidence changed.

Technical Analysis: EUR/USD trades in Descending Triangle formation

EUR/USD consolidates in a Descending Triangle formation on a daily timeframe. The horizontal support is plotted from the two-year low around 1.0330, while the downward-sloping border is drawn from the November 6 high of 1.0937. The outlook of the major currency pair remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) at 1.0433 and 1.0556, respectively, are declining. 

The 14-day Relative Strength Index (RSI) slides below 40.00, indicating that downside momentum is intact.

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 psychological resistance of 1.0500 will be the key barrier for the Euro bulls.