The EUR/USD pair recently scaled to an 18-week zenith, touching 1.1040, before retreating slightly towards the 1.1000 mark as market activities slow down for the holiday season. A crucial driver behind this movement was the US inflation data, which fell short of expectations, reinforcing the market’s anticipation of accelerated Federal Reserve rate cuts in 2024.

Significantly, the US Core Personal Consumption Expenditure (PCE) Price Index for November revealed a lower-than-expected annual increase of 3.2%, trailing the forecasted 3.3% and October’s year-over-year figure of 3.4% (revised down from 3.5%). This softer inflation metric is fueling market speculation about a more rapid pace of rate reductions by the Federal Reserve in the coming year.

Current investor sentiment is outpacing the Fed’s own projections, with expectations for up to 160 basis points in cuts, some even anticipating the cycle to commence as early as March. However, the Fed’s interest rate projections, known as the dot plot, suggest only 75 basis points in reductions by the end of 2024.

The EUR/USD pair has witnessed a significant upward movement, reaching a 18-week high at 1.1040, largely influenced by a weakening US dollar. This downward pressure on the dollar stems from the US inflation data falling short of expectations, leading to market speculation about more aggressive rate cuts from the Federal Reserve in 2024.

Notably, the US Personal Consumption Expenditure (PCE) Price Index, a key inflation indicator, recorded a lower than expected Core Annualized rate of 3.2% for the year through November, compared to the anticipated 3.3% and a previous 3.4%. This discrepancy has prompted expectations of a swifter Federal Reserve response, with markets predicting rate cuts of around 160 basis points, more than double the Fed’s own estimate of 75 basis points by year-end 2024.

The stronger-than-expected US Durable Goods Orders, which came in at 5.4% for November, suggest a potentially more robust economy, potentially impacting the scale and timing of these anticipated rate cuts. Consequently, this softer US inflation outlook, coupled with the prospect of accelerated rate cuts, has led to a depreciating US Dollar, thereby benefiting the EUR/USD currency pair.

On the other hand, indicators like the robust Durable Goods Orders hint at underlying economic strength, which could influence market perceptions.

Additionally, recent remarks from European Central Bank (ECB) officials have contributed to the dynamics of the EUR/USD pair. ECB Vice President Luis de Guindos, speaking on Thursday, emphasized that it’s premature to discuss easing monetary policy, asserting confidence in avoiding a technical recession in the Eurozone. He also highlighted the potential benefits of an EU fiscal reform deal in reducing market uncertainties.

Echoing a similar tone of caution, ECB Governing Council member Martins Kazaks, on Wednesday, indicated the need to maintain current interest rates for some time, suggesting that the first rate cut might be further off than investors currently anticipate, possibly not occurring until mid-2024. Such cautious optimism from the ECB could provide additional support to the Euro.

Despite these expectations, the US economy’s resilience, highlighted by a substantial increase in Durable Goods Orders for November (5.4% against October’s -5.1%, revised from -5.4%), suggests a possibility of fewer rate cuts by the Fed than many anticipate.

On the technical front, the EUR/USD pair remains bullish overall. After rallying from early October lows near 1.0450, the pair has established a series of technical support levels. A key reversal was noted at 1.9793, with the 200-day Simple Moving Average (SMA) advancing towards 1.0850.

Despite the US Dollar’s slight recovery on late Friday, it has generally weakened over the week, almost by a third of a percent against the Euro since Monday. A green close for the EUR/USD would mark its seventh gain in the past nine trading weeks, indicating a persistent bullish trend in the pair.