In European trade on Friday, the euro took a step back from its two-week high against a basket of major rivals, including the dollar. This retracement was attributed to profit-taking as investors adopted a cautious stance ahead of crucial European data for December.

EURO/USD and Weekly Performance

The EUR/USD pair experienced a decline of 0.15%, settling at 1.0977, after achieving a session high at 1.1004. This pullback followed Thursday’s rally of 1.1%, marking the fourth consecutive profitable day and the most significant gain since mid-November. The euro reached a one-week high at 1.1009 during the previous session.

Focus on Major Sectors and European Data

Investors are closely monitoring a batch of critical European data scheduled for release later in the day. This data is expected to provide insights into the performance of the euro zone economy during the fourth quarter. The third quarter saw a substantial contraction in the euro zone economy, primarily attributed to reduced consumer spending and a decelerating Chinese economy.

Weekly European Trade ECB Decision

Despite the day’s retreat, the euro is poised for a weekly profit, having risen by 2% against the dollar. This marks the first weekly gain in three weeks and the most substantial since July.

The European Central Bank (ECB) maintained interest rates at 4.5% this week, consistent with market expectations. This rate is already the highest in 22 years. The ECB acknowledged recent inflation retreat but signaled the possibility of a rebound in the short term. The central bank committed to holding the current interest rate levels until inflation is steered back towards the 2% target. ECB President Christine Lagarde emphasized the need to monitor additional data on wages and prices before making new policy decisions.

Euro In European Trade Outlook and Interest Rate Gap

Following the ECB meeting, market expectations for interest rate cuts in the euro zone next year were slightly reduced from 160 basis points to less than 150 basis points. The current interest rate gap between Europe and the U.S. stands at 100 basis points, the narrowest since May 2022. Analysts anticipate further contraction in March 2024, coinciding with the Federal Reserve’s expected first interest rate cut.

ECB’s Position and Fed’s Approach

The ECB’s position this week leaned towards a more bullish outlook than anticipated, lowering the odds of European interest rate cuts in the first half of 2024. In contrast, the Federal Reserve openly initiated discussions about the next interest rate cut, with market expectations pointing to the March meeting as the likely timing for the first cut.

In conclusion, the euro’s retreat reflects a cautious market sentiment amidst profit-taking and anticipation of key economic data. The ECB’s stance and the evolving interest rate gap dynamics contribute to the nuanced outlook for the euro in the coming months.