EURUSD Spikes Ahead of Eurozone Q4 GDP

The EURUSD briefly rose above the crucial 1.2000 handle amid a dollar crash after Trump said he's not worried about weakness in the greenback, with ECB officials now worried that the euro could get too strong, too fast.

The Key Developments

• The dollar saw its largest drop in four years after Trump said he was okay with a weaker greenback, but the currency found a floor after Bessent's comments and the Fed's more hawkish tone, despite two members dissenting.
• ECB officials are concerned about the rapid appreciation of the euro, which might force the central bank to cut rates to head off deflationary pressure.
• Eurozone Q4 GDP is expected to show cooling, which might curtail some flows into euro-denominated assets.

EURUSD Up on Dollar Decline

The dollar index fell to a four-year low after its largest single-day drop since April of last year. The greenback had been weakening in the days prior, but its precipitous drop came after US President Donald Trump dismissed concerns about the dollar's decline, saying, "I think it's great." Markets interpreted the remarks as a clear indication that the White House would not intervene to support the dollar's decline. However, the currency found some support on Wednesday after US Treasury Secretary Scott Bessent stated in an interview that the US has a "strong dollar policy", and denied intervening in the currency market to support the yen. This was followed by the FOMC meeting, where rates were kept unchanged, as was widely anticipated. The accompanying policy statement took on a more hawkish tone, noting a solid economy, a stabilising labour market, and elevated inflation. The statement left traders with the impression that the Fed is more likely to keep rates unchanged for a longer period. 

Traders dove into safe havens, worried about the USD's fragility and the rising trend of dedollarisation. The euro was one of the largest beneficiaries, accounting for 58% of the dollar index basket. Previously, central banks had indicated that they were looking to increase their reserves in euros and reduce their exposure to the dollar. While gold shot higher, the Swiss franc soared to its highest level against the dollar in a decade, gaining 17% over the last year. Potentially further weakening the dollar is the pending announcement of a replacement for Fed Chair Jerome Powell. As markets grow increasingly concerned about the Fed's independence, the euro, backed by the world's largest economy, is becoming more attractive amid the uncertainty surrounding the Trump Administration's foreign policy. However, a rapid appreciation of the shared currency could cause monetary policy headaches in Frankfurt, where the ECB has been able to stay on the sidelines as inflation remains at target.

EU Economy Cooling

One of the attractions of the euro has been the expectation that EU assets would appreciate amid increased government spending to meet their NATO defence obligations. However, the shared economy has struggled to gain momentum and could jeopardise further gains for the euro if stock markets don't return and break new record highs. On Friday, the Eurozone's preliminary Q4 GDP figures are expected to show quarterly growth of 0.2%, down from 0.3% in the prior quarter. Notably, immediately after the EURUSD broke above 1.20, officials at the ECB expressed concern about the currency's rapid appreciation, warning it could drag inflation lower. This could put additional pressure on the shared central bank to cut rates. The ECB will hold its policy meeting next week, with economists unanimous in expecting the bank to keep rates unchanged.

EURUSD Leaves Behind Triangle Pattern

The recent spike in the euro has triggered what appears to be a triangle breakout, with the measured move suggesting a 4.7% rise to 1.2323 from the breakout point at 1.1770. However, with RSI overbought and the 1.2000 handle rejecting bullish price action, a pullback to 1.1900-1.1920 is probable. A breakdown below that level would expose the 1.1800 swing, while a leg above the park of 1.2085 would bring into focus 1.2100 and 1.2200.

Source: SpreadEx | EURUSD, Daily Chart