The euro weakened further against the US dollar after the release of US inflation data on Wednesday. The EUR/USD pair fell for the fourth consecutive trading day, dropping to just under 1.05, the lowest level since 2 December. However, the euro rebounded slightly in the early Asian session on Thursday, ahead of the European Central Bank (ECB) rate decision later today.

US inflation data showed headline inflation rising by 2.7% year-over-year in November, up from 2.6% in October. Core inflation increased by 0.3% month-over-month and 3.3% year-over-year, matching expectations. These figures reinforced market predictions for a modest 25-basis-point rate cut by the Federal Reserve in December. The stronger US dollar, buoyed by recent data, continues to exert downward pressure on the euro.

Michael Brown, a senior research analyst at Pepperstone, noted that the Fed’s policy normalization is expected to slow further in 2025. A potential pause in the Fed’s easing cycle could extend the dollar’s rally, compounding the euro’s weakness.

Euro Faces Persistent Weakness Amid Global and Domestic Challenges

The euro has fallen nearly 4% since early November, facing both global and domestic pressures. Globally, Trump’s tariff threats and stronger US economic data weigh heavily on the euro. Domestically, weak economic growth and political uncertainties in the Eurozone undermine the currency’s competitiveness.

The ECB is expected to implement a gradual 25-basis-point rate cut today, with analysts predicting further cuts in 2025. A Reuters consensus projects another 1% reduction in the new year, bringing deposit rates to 2%. However, the ECB’s cautious pace may not be enough to counteract the euro’s ongoing challenges.

Political instability in Germany and France exacerbates the euro’s struggles. In Germany, Chancellor Olaf Scholz faces a confidence vote on 16 December, raising the possibility of early federal elections. In France, the government struggles to pass its budget, potentially hindering deficit reduction efforts. These uncertainties have driven sharp declines in German and French bond yields, now at 2.13% and 2.90%, respectively.

The spread between the 10-year bond yields of Germany and France recently surged to 89 basis points, the highest since 2012, reflecting heightened market concerns. In contrast, the US 10-year bond yield remains steady at 4.29%, attracting investors seeking higher returns. This divergence in bond yields continues to favor the dollar, adding further pressure on the euro.