Original article by James Hyerczyk for FX Empire
Rewritten and expanded by [Your Name]
Title: U.S. Dollar Tumbles Following Powell’s Dovish Tone: In-Depth Analysis of EUR/USD, GBP/USD, USD/CAD, and USD/JPY Currency Pairs
The U.S. dollar took a significant hit during the midweek trading session following comments by Federal Reserve Chair Jerome Powell. His remarks at a closely watched policy forum hinted toward a more cautious approach to further interest rate hikes, causing markets to reevaluate the Fed’s monetary stance for the remainder of 2024. The result: a broad-based decline in the dollar, accompanied by strength in major currencies like the euro, British pound, Canadian dollar, and Japanese yen.
This article breaks down the key developments contributing to the dollar’s drop and provides an in-depth technical and fundamental analysis of the four major currency pairs: EUR/USD, GBP/USD, USD/CAD, and USD/JPY.
Why the Dollar Declined: A Quick Summary
Jerome Powell’s recent testimony before Congress dominated financial headlines as he acknowledged both the progress made in controlling inflation and the economic risks of keeping interest rates elevated for too long. His tone marked a shift from prior aggressively hawkish stances and was interpreted by market participants as dovish.
Here are the major takeaways from Powell’s statements:
– Inflation is declining, and tighter monetary policy is playing a role.
– The Federal Reserve will continue to monitor inflation data for clear signs of sustained progress.
– Risks to the U.S. economy have become more balanced, opening up discussions for potential rate cuts later in 2024.
– The Fed is committed to its dual mandate of price stability and maximum employment, increasing the possibility it may lower rates if inflation continues to cool.
This perceived shift in Fed policy expectations weakened the U.S. dollar and increased investor appetite for risk-sensitive and yield-seeking assets. Consequently, various G10 currencies rallied sharply against the greenback.
EUR/USD: Breakout Driven by Optimism and Technical Support
The euro posted a robust rally in the aftermath of Powell’s remarks, breaking above a key resistance level around 1.0800 and currently trading nearer to 1.0850.
Fundamental Drivers:
– The odds of a September rate cut by the Fed increased significantly after Powell’s testimony. Fed Futures now place a nearly 75% probability of a 25-basis-point rate cut by September.
– Eurozone inflation remains elevated, though data has begun to soften. Investors believe the European Central Bank will move cautiously on cutting rates.
– While economic growth in the Eurozone is sluggish, the relative positioning of monetary policy between the Ecozone and the U.S. has narrowed, favoring the euro.
Technical Analysis:
– Resistance levels: The next target is 1.0900, followed by 1.0960.
– Support levels: Minor support sits near 1.0785, while critical support lies at 1.0720.
– The RSI (Relative Strength Index) is trending upward but not yet in overbought territory, suggesting further upside is possible.
Outlook: With Fed rate cut expectations rising and ECB believed to hold steady over the short term, EUR/USD may trend higher in the coming weeks. A sustained break above 1.0900 could open the path to 1.1000.
GBP/USD: Pound Surges on Hawkish BoE and Dovish Fed Divergence
The British pound has benefitted not only from dollar weakness but also from expectations that the Bank of England (BoE) might delay rate cuts until later in the year due to persistently high domestic inflation.
Key Drivers:
– UK inflation remains stubbornly above the BoE’s 2% target.
– The employment market in the UK is still tight, potentially discouraging the BoE from cutting rates too aggressively.
– Political stability following the UK’s general election has removed a key uncertainty for the pound.
Technical Analysis
Read more on USD/CAD trading.