Title: US Dollar Strengthens Against Euro as Market Watches Fed Rate Cut Outlook
Original Author: Gertrude Chavez-Dreyfuss (Reuters)
The US dollar posted a modest advance against the euro on Monday, driven by cautious investor sentiment ahead of a series of pivotal economic events this week. Market participants closely monitored incoming data and a scheduled appearance by Federal Reserve Chair Jerome Powell for further insight into the Federal Reserve’s future monetary policy direction.
The foreign exchange markets remained relatively quiet during the day’s earlier sessions, with traders adopting a wait-and-see approach ahead of critical events that could influence the US central bank’s policy stance. A stream of labor market data, culminating in Friday’s highly anticipated nonfarm payrolls report, and Powell’s scheduled congressional testimony on Tuesday dominated investors’ focus.
Key Highlights:
– The US dollar gained against the euro due to renewed speculation surrounding the Federal Reserve’s timeline for potential interest rate cuts.
– Investors await multiple high-impact US economic indicators, including June’s nonfarm payrolls and job openings data.
– Federal Reserve Chair Jerome Powell is likely to offer clarity regarding the central bank’s policy outlook in his congressional testimony.
– The euro experienced downward pressure following disappointing manufacturing data from the eurozone.
– Market expectations for a September Fed rate cut hold steady despite mixed US economic readings.
– Month-end flows added to volatility, encouraging a cautious trading tone.
Fed Policy Uncertainty Remains Center Stage
The overarching narrative guiding forex market movements remains speculation about the Federal Reserve’s next moves. Although recent inflation readings—particularly May’s Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure—show signs of easing, policymakers continue to signal caution.
– The Core PCE index rose 0.1% in May, marking the smallest gain in six months. This brought the year-over-year increase to 2.6%, in line with forecasts and down slightly from April’s 2.8% annual rise.
– While inflation data has softened recently, Federal Reserve officials remain hesitant to confirm when they will begin easing monetary policy.
– Some policymakers have suggested that inflation needs to show more consistent progress toward the 2% target before rate reductions become viable.
According to market-based pricing, traders continue to bet on the likelihood of two interest rate cuts in 2024. Currently, fed funds futures indicate a roughly 61% probability of a 25 basis point cut at the Federal Open Market Committee’s (FOMC) September meeting.
“Last week’s inflation data provided some positive indications, particularly the PCE coming in line with expectations,” said Vassili Serebriakov, FX strategist at UBS in New York. “But we think Powell will remain cautious and leave the door open for further improvement before committing to a rate cut.”
US Dollar Gains Modestly Against Euro
In Monday’s session, the euro weakened by about 0.2% versus the dollar, trading at $1.0719 as of the afternoon. The greenback found support as traders sought safe-haven assets and adjusted positions ahead of Powell’s upcoming statements.
– One factor behind the dollar’s strength was investor caution amid the buildup to key US job data and Powell’s congressional testimony.
– On the euro side, soft economic releases weighed on the single currency. Euro area manufacturing activity shrank for the 24th consecutive month in June, based on the final S&P Global Eurozone Manufacturing Purchasing Managers’ Index (PMI). The index registered at 45.8, below the breakeven level of 50 and significantly under June 2023 levels.
“The euro is struggling due to weak demand conditions across the euro area. Simultaneously, the Fed may still signal reluctance to ease too soon,” explained Chris Turner, global head of markets at ING in London.
Upcoming Labor Data Seen as Crucial
The first full week of July brings a trio of influential labor market metrics, each carrying the potential to impact perceptions of the Fed’s
Read more on EUR/USD trading.