EUR/USD trades with caution ahead of ECB interest rate decision, Eurozone-US Q4 GDP

• EUR/USD remains on tenterhooks around 1.0420 as the ECB's policy meeting looms large.
• The ECB is expected to cut interest rates by 25 bps and deliver a dovish guidance.
• The Fed kept interest rates steady in the range of 4.25%-4.50% on Wednesday.

EUR/USD trades cautiously around 1.0420 in Thursday's European session as investors focus on the European Central Bank's (ECB) monetary policy decision, which will be announced at 13:15 GMT. The ECB is widely anticipated to cut its Deposit Facility Rate by 25 basis points (bps) to 2.75%, with the Main Refinancing Operations Rate sliding to 2.9%, and leave the door open for further policy easing.

Traders have already priced in four interest rate cuts this year, see them coming by the summer, which would push the key Deposit Facility Rate to 2%. A string of ECB officials has been comfortable with dovish bets but not with the timeframe, and they see the 2% rate coming by year-end. ECB officials have also anticipated 2% as a neutral rate, which neither stimulates nor weighs on economic growth.

Dovish ECB bets are based on the assumption that inflationary pressures in the Eurozone are sustainably on track to return to the central bank's target of 2%. Investors are also worried that potential tariffs by United States (US) President Donald Trump could falter the Eurozone economic outlook, which is already going through a rough phase as the growth of its powerhouse nation, Germany, is expected to shrink again. 

The Federal of German Industries (BDI) forecasted on Tuesday that the German economy will shrink for the third year in a row as the government has been unable to address structural weaknesses in the national economy.

Ahead of the ECB's policy decision, investors will pay close attention to the flash Eurozone Gross Domestic Product (GDP) data for the fourth quarter of 2024, which will be published at 10:00 GMT. Economists expect the shared bloc to have expanded by 0.1% quarterly compared to the 0.4% growth in the third quarter. Compared to the same quarter of 2023, the Eurozone economy is estimated to have risen by 1.0%, faster than 0.9% growth in the third quarter of 2024.

Daily digest market movers: EUR/USD follows US Dollar's footprints

• The lackluster trend in the EUR/USD pair could also be attributed to a sideways trend in the US Dollar (USD) after the Federal Reserve's (Fed) monetary policy announcement on Wednesday, in which the central bank left interest rates unchanged in the range of 4.25%-4.50%. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, wobbles around 108.00.
• The Fed was already expected to announce a pause in the policy-easing spell as market participants were worried about stalling progress in the disinflation trend towards the central bank's target of 2%. In the press conference, Fed Chair Jerome Powell adopted a cautious stance on interest rates and said that the central bank would resume the rate-cut cycle only after seeing "real progress on inflation or at least some weakness in the labor market".
• In December, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, decelerated to 3.2% year-over-year but remained well above the Fed's desired rate of 2%. For more cues on the current status of inflation, investors will focus on the US Personal Consumption Expenditure Price Index (PCE) data for December, which will be released on Friday.
• When asked about whether the Fed will follow President Trump's call for immediate rate cuts, Powell said, "The committee is very much in the mode of waiting to see what policies are enacted." 
• In Thursday's session, investors will focus on the preliminary US Q4 GDP data, which will be published at 13:30 GMT. The US economy is expected to have grown by 2.6% compared to the same quarter of 2023 but slower than the 3.1% growth in the previous quarter.

Technical Analysis: EUR/USD drops to near 20-day EMA

EUR/USD fell to near the 20-day Exponential Moving Average (EMA), which trades around 1.0395, on Wednesday in a corrective move from Monday's high of 1.0530. The major currency pair weakens after failing to sustain above the 50-day EMA, which trades around 1.0450.

The 14-day Relative Strength Index (RSI) failed to climb above the 60.00 hurdle after recovering from below the 40.00 level, suggesting that the trend would be sideways.

Looking down, the downward-sloping trendline from the September 30, 2024, high of 1.1209 will act as major support for the pair near the round level of 1.0300, followed by the January 20 low of 1.0266. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.