EUR/USD Dollar Strength Persists Amid ECB and Inflation Signals

Dollar Resilience Bolstered by Inflation DataThe U.S. dollar has ended the week on a strong note, buoyed by firmer-than-expected inflation data. Recent figures showed steady price pressures, reinforcing market confidence in the Federal Reserve's current policy stance. Although the upcoming release of the core CPI deflator is projected to be moderate, the broader inflation narrative has kept U.S. Treasury yields supported, further enhancing the dollar’s appeal.

Notably, the dollar index (DXY) has been testing key resistance levels, with quiet market conditions favouring its continued strength. December’s typical seasonal dollar weakness has yet to materialize, providing further encouragement for dollar bulls.

DXY Chart H4 Source: TradingView Chart Euro Struggles Against Policy and Market SentimentOn the European side, the European Central Bank (ECB) recently held its policy meeting, and while ECB President Christine Lagarde struck a less dovish tone than anticipated, the euro still faced headwinds. The broader outlook for eurozone interest rates remains bearish, with indications that the ECB may continue to reduce rates even after reaching the so-called “neutral” zone.

A widening yield spread between Italian and German bonds further reflects investor concerns, though much of this movement appears tied to profit-taking rather than deeper structural fears. Against this backdrop, EUR/USD has remained anchored near the 1.05 mark, with little impetus to move beyond this range in the short term.

EURUSD H4 Chart Source: Finlogix Charts The Next Big Test: U.S. Federal Reserve MeetingLooking ahead, all eyes are on next week’s Federal Open Market Committee (FOMC) meeting. While the market does not anticipate any drastic policy changes, the event could still serve as a catalyst for the EUR/USD pair. For now, the pair is expected to trade within a narrow range of 1.0450-1.0550, as traders assess the evolving monetary policy landscapes on both sides of the Atlantic.

CME FedWatch Tool Source: CME Elsewhere, central bank actions in Switzerland and the Czech Republic have added to the complexity of the global FX landscape. The Swiss National Bank's decision to cut rates more aggressively underscores the diverse monetary policy responses across regions. Meanwhile, muted market reactions in Central and Eastern Europe suggest limited spillover effects from ECB decisions.

What’s Next for EUR/USD?For euro bears, the near-term outlook appears favourable. With the dollar maintaining its carry advantage and the ECB facing persistent challenges, the EUR/USD pair is unlikely to break higher without a significant shift in fundamentals. However, unforeseen geopolitical or economic developments could always alter this dynamic. I’ve done a video on ECB rate cuts last week you can check it out HERE.

In summary, the EUR/USD remains firmly within its established range, reflecting the broader tug-of-war between a resilient dollar and a struggling euro. As markets head into the holiday season, cautious positioning and close monitoring of key data releases will be critical for traders navigating this landscape.

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