EUR/USD struggles for direction just above the 1.1600 barrier on turnaround Tuesday, navigating a narrow range in a context of a mild bounce in the US Dollar (USD).
The pair’s irresolute price action follows a tepid recovery attempt in the Greenback, with the US Dollar Index (DXY) orbiting around the 99.50 region amid mixed US Treasury yields across various time frames.
In the meantime, the generalised soft tone surrounding the US Dollar continues to follow expectations of another quarter-point interest rate cut by the Federal Reserve (Fed) at its December 10 gathering, while the idea of a more dovish Fed in the next few months also corroborates with the heavy trading around the buck.
Let’s not forget about the US shutdown
The US government may have reopened after a 43-day shutdown, but there’s no real sense of victory in Washington. Lawmakers only agreed to fund operations through January 30, meaning another budget fight is already pencilled in.
The twist this time? The pressure didn’t come from where you’d expect. It wasn’t Republicans pushing hardest for cuts; it was Democrats refusing to budge, saying the shutdown helped highlight the surge in healthcare insurance costs affecting roughly 24 million Americans. Republicans countered that the standoff caused needless disruption: delayed benefits, unpaid federal workers, interrupted services, all while the national debt keeps swelling toward $38 trillion, rising by around $1.8 trillion a year.
Bottom line: Nobody’s acting like fiscal tensions are cooling.
Fed: Careful moves, nothing more
The Federal Reserve did exactly what markets thought it would on October 29: a 25 basis point cut and a light restart of Treasury buying to keep money markets running smoothly. That puts the Fed Funds Target Range (FFTR) at 3.75%–4.00% after a 10–2 vote.
Chair Jerome Powell made sure expectations didn’t run wild: this was about insurance, not the start of a rapid easing cycle. Policymakers are still split, and Powell stressed that a December cut isn’t a done deal.
Minutes from that meeting made that tension clear, as most officials supported trimming rates a touch, but several warned against going too fast and risking the progress made on inflation, which remains (well) above the Fed’s 2.0% goal.
Markets aren’t fully buying the caution, as pricing still suggests almost 85% odds of another cut next week and just over 86 basis points of easing priced through year-end 2026.
ECB: Happy to cruise for now
Across the Atlantic, the European Central Bank (ECB) kept things steady for a third straight meeting, holding the policy rate at 2.00%. Inflation and growth are sitting near levels policymakers are comfortable with, and after 200 basis points of cuts already delivered this year, there’s no urgency to tweak policy again.
President Christine Lagarde did note the global backdrop feels a little less tense, helped by calmer US-China relations, but she was also clear that uncertainty remains high.
The latest Accounts showed a broad view inside the ECB that no more easing is needed for the time being. Markets clearly agree: around a 98% chance of no move at the December 18 gathering, and only minimal adjustments expected through 2026.
Tech Corner
EUR/USD’s robust recovery from late November lows just below 1.1500 appears to have run into some solid resistance around the 1.1650 region for now.
The continuation of the ongoing upward bias faces an immediate hurdle at the December high at 1.1652 (December 1), almost coincident with the November peak at 1.1656 (November 13) and marginally ahead of the weekly top at 1.1668 (October 28). Extra gains from here should pave the way for a potential test of another weekly high at 1.1728 (October 17) and the October ceiling at 1.1778 (October 1).
In the opposite direction, a drop beneath the weekly low at 1.1491 (November 21) exposes a probable slide toward the November base at 1.1468 (November 5) ahead of the key 200-day SMA at 1.1443. Further weakness could prompt a test of the August floor at 1.1391 (August 1) to emerge on the horizon, ahead of the weekly valley at 1.1210 (May 29) and the May bottom at 1.1064 (May 12).
The upside bias in the pair remains well in place for the time being. However, near-term momentum indicators appear not that convinced for now. Indeed, the Relative Strength Index (RSI) eases to the boundaries of the 54 level, suggesting that further gains still remain in the pipeline. However, the Average Directional Index (ADX) in the sub-12 region tells us that the current trend still lacks muscle.
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To sum up
EUR/USD still feels like it’s missing the spark it had earlier in the year. With the Eurozone offering few fresh catalysts and the Fed keeping its options open, the Euro (EUR) continues to take direction mostly from the US side of the equation. Until the Fed shows a clearer commitment to easing, or risk sentiment turns decisively higher, gains are likely to remain a grind rather than a breakout.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
