16.01.202515:15 Forex Analysis & Reviews: EUR proves its malaise

Wishing for success but held back by weaknesses—a slowdown in core US inflation in December to 0.2% MoM triggered a massive risk rally. Stocks posted their strongest performance since the presidential elections, Treasury yields plummeted, and Bitcoin briefly climbed back above 100,000. Under such conditions, EUR/USD bears usually find themselves out of place. Yet this time, the EUR/USD pair remembered that the euro has its vulnerabilities, enabling the bears to launch a meaningful counterattack.

French Prime Minister Francois Bayrou raised the proposed budget deficit to 5.3% of GDP compared to 5.1% under his predecessors. Nevertheless, compromise with the parliament remains elusive. Markets see no clear path to reducing the deficit to the EU-required 3%. As a result, the spread between French and German bond yields has stalled near 80 basis points—twice the level seen before the elections. Investors anticipate a rise to 100 basis points and the risk of another election in the summer of 2025.

Yield Spread Dynamics of European Bonds

Germany is now rightly seen as Europe's "sick man." Its GDP contracted by 0.2% in 2024 after a 0.3% decline in 2023. Apart from this, a vote of no confidence in Olaf Scholz's government, his resignation, early parliamentary elections in February, and the rise of the Weil Misery Index all point to a bleak outlook for what was once the leading economy of the eurozone.

Deflation risks in the eurozone are prompting the ECB Governing Council to maintain a dovish stance. Olli Rehn and Mario Centeno suggest that the deposit rate could fall to 2%. Rehn asserts that the ECB should not follow in the Federal Reserve's footsteps, nor should Europe become "the 51st state of the United States." Even in light of US inflation data, the futures market remains uncertain whether the Fed will take one or two steps toward monetary easing in 2025.

Weil Misery Index Dynamics

The differing pace of monetary easing in Washington and Frankfurt underpins the downward trend in EUR/USD. Breaking this trend would require significant cooling of the US economy and a major boost in Europe. In light of fiscal stimulus and Donald Trump's tariffs, such a scenario seems unlikely.

Yes, upward corrections will undoubtedly occur, possibly driven by disappointing US statistics or slow implementation of the tariffs hikes promised by Trump during his campaign. However, these will represent corrections rather than a trend reversal. Therefore, any long positions in the euro should be exited quickly, while shorts should be held for as long as possible.

Technically, on the daily EUR/USD chart, the bears are preparing to attack the lower border of the fair range between 1.0265 and 1.0445. A successful break below this support level would increase the likelihood of a resumed downtrend and provide a basis for returning to short positions targeting 1.012 and 1.000.