Title: US Rate Cut Expectations Weigh on Dollar, Boost Euro and Pound, While Yen and Loonie Underperform
Author: Adapted from original article by James Hyerczyk, FXEmpire
The US dollar retreated on Tuesday as renewed bets on potential interest rate cuts by the Federal Reserve weighed on demand for the greenback. This dovish sentiment emerged after recent US economic data indicated signs of softening in both labor market conditions and inflation, weakening the case for sustained higher interest rates.
The euro and British pound advanced strongly against the dollar, supported by hawkish tones from their respective central banks amid slower US growth signals. Conversely, the Japanese yen and Canadian dollar lagged behind their G10 peers due to domestic economic and policy dynamics. Currency markets are now responding dynamically to diverging central bank policies and updated economic projections.
Below is a breakdown of key developments across major currency pairs and the macroeconomic factors influencing their movement:
US Dollar Weakens on Rate Cut Prospects
The US dollar, measured against a basket of major currencies via the US Dollar Index (DXY), fell as traders positioned for a more accommodative stance by the Federal Reserve in the face of softening economic data. The DXY slipped below 105.00, with futures markets now pricing in multiple rate cuts by the end of 2024. The dollar had previously seen strength on expectations that high inflation would force the Fed to maintain a hawkish stance. However, recent data has shifted this narrative.
Key factors influencing the dollar’s decline:
– Jobless Claims: Weekly unemployment claims have been gradually rising, signaling potential weakness in the labor market.
– Inflation Data: The US core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, showed signs of cooling in recent months.
– ISM Manufacturing and Services: Both of these indices have displayed deceleration, suggesting weaker economic momentum.
– Market Expectations: According to the CME FedWatch Tool, interest rate futures now imply a 70 percent chance of at least one rate cut by September 2024 and two cuts by year-end.
The Federal Reserve has thus far remained cautious, maintaining that its decisions will rely on incoming data. However, recent economic softness may prompt a pivot faster than anticipated.
EUR/USD Rises as ECB Maintains Cautious Optimism
The euro climbed against the US dollar, pushing EUR/USD closer to 1.0850 as investors priced in diverging monetary policy paths between the European Central Bank (ECB) and the Fed. Although the ECB, under Christine Lagarde, is also expected to ease rates in the coming meetings, officials have sounded more measured than dovish. This measured tone has offered some support to the euro.
Supporting factors for the euro:
– ECB Policy Outlook: While a June rate cut is widely anticipated, ECB officials continue to emphasize that future rate decisions will be “data-driven” and gradual.
– Inflation Persistence: Core inflation in several Eurozone countries remains above the ECB’s 2 percent target, particularly in services.
– Political Stability: Recent political calm and stable economic readings in Germany and France have boosted investor sentiment.
Markets now anticipate a 25-basis-point rate cut at the upcoming June ECB meeting, followed by possibly one or two additional reductions later in the year. Despite these cuts, as long as US rate cut expectations accelerate, the euro stands to benefit.
GBP/USD Extends Gains on Hawkish BOE Rhetoric
The British pound found solid footing, climbing toward 1.28 against the US dollar, buoyed by expectations that the Bank of England (BoE) will delay its own easing cycle relative to the Federal Reserve. The pound has outperformed many G10 currencies so far in 2024, thanks largely to relatively robust economic data in the UK.
Factors supporting the pound:
– CPI Data: Inflation remains sticky, particularly in core and services components, keeping the BoE on alert.
– Wage Growth: Strong wage growth continues to pose
Read more on USD/CAD trading.