On Thursday (January 30th), the market fluctuated violently against the backdrop of the upcoming interest rate decision by the Eurozone Central Bank (ECB), with the euro/dollar (EUR/USD) currently trading at 1.0417, a slight decrease of 0.04% for the day. The market is highly concerned about the upcoming ECB monetary policy statement, which is expected to have a significant impact on the euro exchange rate.

Current market environment and focus

As the European Central Bank (ECB) is about to announce its latest monetary policy decision this Thursday, tensions in the foreign exchange market continue to rise. The market generally expects the ECB to continue cutting interest rates at this meeting, with an expected 25 basis points reduction to 2.75%. If this measure comes true, it will be the fourth consecutive interest rate cut by the ECB since September 2024, demonstrating its policy inclination in the face of weak eurozone economy and persistent high inflation pressure.

ECB cuts interest rates and outlook for the euro

At the last monetary policy meeting in December 2024, ECB President Lagarde stated that despite facing economic growth risks, inflation risks in the eurozone remain "two-way," indicating that the ECB is still struggling to effectively curb high inflation while continuing to focus on economic growth. According to Eurostat, the Consumer Price Index (HICP) for the Eurozone in December 2024 increased by 2.4% year-on-year, slightly higher than the previous month's 2.2%. Although the data meets market expectations, it still fails to bring inflation back to the target range of 2%, indicating the stickiness of inflation.

It is worth noting that Lagarde reiterated during the World Economic Forum in Davos, Switzerland that although inflation has eased, the Eurozone's inflation target for 2025 will still be higher than 2%, and the current monetary policy adjustment will remain gradual. This means that although the market generally expects this interest rate cut, the ECB's policy outlook will still be a gradual adjustment, and there is no clear signal of "accelerated interest rate cuts".

Technical Analysis of Euro

The recent trend of EUR/USD has shown a certain correction downward trend, but still shows the potential for further recovery. On the daily chart, the Relative Strength Index (RSI) has held at the 50 level, indicating that even if there is a short-term correction, long-term upward momentum still exists. If the EUR/USD can continue to break through the 50 day simple moving average (SMA) 1.0422 and steadily close above this level, it may bring further upward momentum to the euro, challenging the levels of 1.0500 and 1.0533.

However, if downward pressure regains its dominant position, the euro may test the support level of 1.0355 for the SMA on the 21st. If this support level falls, the EUR/USD may further explore the psychological level of 1.0300, or even fall below the 1.0265 level, opening up more space for the downward trend.

The Market Impact of the European Central Bank Policy Meeting

It is expected that the policy statement of the European Central Bank will be a key event in the foreign exchange market this week. If Lagarde hints at further easing policies at the press conference after the meeting, especially mentioning the magnitude of interest rate cuts or sluggish economic growth, the euro may face greater downward pressure. On the contrary, if she emphasizes the gradual nature of monetary policy and does not send a more hawkish signal, the euro may stabilize near the current price level and even experience a certain degree of rebound.

A well-known analysis institution pointed out that although inflation data still shows some upward pressure, there is no significant sign of recovery in the eurozone economy, and the ECB's monetary policy will continue to rely on changes in economic data rather than rapid policy shifts. This means that while interest rate cuts may help stimulate the economy in the short term, they may also exacerbate the depreciation pressure on the euro, especially given the relatively strong performance of the US economy.

Future Trends and Prospects

In the coming days, as the ECB's monetary policy decision approaches, the euro against the US dollar will face high levels of uncertainty. If interest rates continue to decline, especially by relaxing expectations of future rate hikes in policy statements, further weakness of the euro will be inevitable. From a technical perspective, if the EUR/USD falls below the support level of 1.0355, it may enter a deeper adjustment range, especially considering that the US economic data is relatively stable and the US dollar still has relatively strong fundamental support.

However, if the market interprets the ECB's statement as leaning towards moderation and continuing to advocate for a gradual monetary policy, the euro may maintain a volatile consolidation within its current range, and even rebound with the support of a technical rebound. At this point, investors should closely monitor Lagarde's words and changes in future economic data, and it is expected that the short-term direction of the euro against the US dollar will be greatly influenced by the details of ECB policies.

Overall, the euro against the US dollar still faces significant volatility risks in the short term, and market trends will depend on the detailed arrangements of the ECB's future monetary policy and further evolution of the economic situation in the eurozone.