As 2024 draws to a close, the financial markets find themselves in a challenging phase marked by liquidity shortagesThis is largely due to the holiday season, which has led many investors to retreat from trading activities, resulting in a significant decrease in overall trading volumesIn this environment, the exchange rate of the euro against the dollar has been meandering within a narrow band just above the 1.0400 mark, with market participants struggling to find a clear directional guide.

Reflecting on the last year, the performance of the euro against the dollar has been less than stellar, showing a cumulative decline of nearly 5.5%. This downward trend has been primarily driven by the European Central Bank's increasingly dovish monetary policy stance, coupled with the potential for trade tensions between the United States and Europe

Throughout this year, the ECB has cut interest rates multiple times, bringing the deposit facility rate down to 3%, and it is anticipated that it will drop further to 2% by June 2025. These rate cuts highlight the ECB's concerns regarding slowing economic growth in the eurozone and have intensified negative sentiment towards the euro on the market.

Simultaneously, trade tensions between the U.Sand Europe have exerted additional pressure on the euroThe United States has imposed more stringent measures on European exports, potentially hampering economic growth in the eurozone even furtherThis degree of uncertainty continues to erode investor confidence in the euro, thus propelling the sustained decline of the euro against the dollar.

From a technical perspective, the euro has been consolidating near a two-year low of 1.0335. Although there has been a slight recovery, with prices inching above 1.0400, the broader trend remains weak, characterized by a fluctuating rhythm

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The 20-day and 50-day exponential moving averages show a downward trajectory, illustrating the persistent bearish pressure faced by the euro against the dollarFurthermore, the 14-day Relative Strength Index (RSI) hovers around 40, suggesting that the market is experiencing weaknessShould the RSI linger below 40, it may further amplify selling momentum for the euro.

As the year-end holidays approach, trading activity is typically expected to decline considerablyCoupled with uncertainties surrounding the forthcoming U.SISM manufacturing purchasing manager index data, the short-term movement of the euro-dollar pair is likely to remain confined within a low liquidity environmentIn this scenario, both buyers and sellers might display limited willingness to engage, which restricts market dynamics, causing overall volatility to remain subdued and the exchange rate to oscillate within a relatively tight range

However, a mid-term analysis unveils that the ECB's sustained dovish stance, releasing an excessive amount of liquidity, fosters a looser monetary environment in the eurozone, ultimately diminishing the euro's appealAdditionally, the unresolved trade tensions between the U.Sand Europe continue to undermine the economic outlook for EuropeShould the prevailing market sentiment persist with pessimism towards the euro and bearish forces accumulate, there's a high likelihood that EUR/USD could breach the low of 1.0330, probingly testing the support level of 1.0200, amplifying downward pressure on the euro exchange rate.

Conversely, the dollar's strong momentum is projected to continue over the next few monthsFrom the standpoint of U.Seconomic data, several recent indicators illustrate robust performance, such as a resilient labor market, low unemployment rates, and consistently strong consumer spending

These factors collectively indicate the solidity of the U.Seconomic foundationFurthermore, a review of the Federal Reserve's monetary policy insinuates a hawkish stance which bolsters the dollarAccording to the latest dot plot from the Fed, policymakers largely anticipate that the federal funds rate will stabilize around 3.9% by the end of 2025. Such expectations suggest a significant deceleration in future rate cuts, contrasting sharply with potential easing measures from some other major central banksThis juxtaposition further enhances the allure of dollar-denominated assets, likely triggering an influx of international capital seeking higher returns, thereby solidifying the dollar's strength.

Looking ahead, investors are bracing for forthcoming economic data releases, including the U.Snon-farm payrolls, inflation metrics, as well as GDP growth and manufacturing PMI from Europe

These data points serve as a barometer for market conditions, assisting investors in accurately evaluating market directionGiven the current environment characterized by reduced liquidity and cautious market sentiment, it stands to reason that the euro against the dollar may continue to exhibit a trend of consolidationIn the short term, the forces of supply and demand appear relatively balanced, thereby curtailing exchange rate fluctuationsNevertheless, from a medium to long-term perspective, the euro remains under substantial downward pressureOn one hand, the ECB's ongoing implementation of dovish policies renders the eurozone's monetary supply comparatively looser, thereby diluting the inherent value of the euro; on the other hand, robust economic performance in the U.Sheightens the attractiveness of dollar-denominated assetsConsequently, it becomes imperative for investors to maintain vigilance, adjusting their investment strategies in response to evolving market dynamics, in order to adeptly navigate the complexities of the financial landscape.