**U.S. Dollar Retreats on Dovish Fed Expectations: In-Depth Analysis of EUR/USD, GBP/USD, USD/CAD, and USD/JPY**
*By Vladimir Zernov. Adapted and Expanded Analysis.*
The U.S. dollar took a step back in recent trading sessions as investors increased their bets on a more dovish Federal Reserve stance in upcoming monetary policy decisions. Markets have begun pricing in the possibility of interest rate cuts as early as this year, driven by signs of cooling inflation and tamed job market pressures, which are feeding expectations that the Federal Reserve may soon pivot its policy focus from inflation control to economic growth support.
This shift in sentiment has had notable ripple effects across the major currency pairs, particularly against the euro, British pound, Canadian dollar, and Japanese yen. Let’s explore how each of these pairs has responded to the latest macroeconomic developments shaping the foreign exchange (Forex) landscape.
## Key Factors Impacting the U.S. Dollar
Several macroeconomic factors are pressuring the greenback:
– **Soft U.S. economic data**: Recent reports, including weaker-than-expected job openings and ISM manufacturing data, have added to the narrative that the U.S. economy may be showing signs of slowing down. This casts doubt on the Fed’s ability to hold rates at current levels through the end of the year.
– **Inflation near target**: Inflation has shown signs of moderation, particularly in core Personal Consumption Expenditures (PCE), the Fed’s preferred gauge. As a result, policymakers may no longer see the need to maintain restrictive rates for long.
– **FedSpeak and market expectations**: Recent comments by Fed officials have varied, with some advocating patience while others acknowledge the economy’s softening trajectory. Fed funds futures now show increased probability for a rate cut before year-end based on data from CME Group’s FedWatch tool.
– **Geopolitical risk easing**: Investor risk appetite has stabilized with reduced global tensions, prompting capital to shift from safe-haven assets like the dollar into higher-yielding assets and currencies.
Against this broader backdrop, let’s analyze the most significant FX pairs and how they’re trading in response.
## EUR/USD: Euro Finds Support as Dollar Weakens
The euro has regained momentum as the dollar’s strength wanes. The EUR/USD pair has been trading near the 1.0860 level in recent sessions, showing resilience amid dovish Fed speculation.
### Technical Overview
– **Resistance levels** are seen near 1.0880 and 1.0920, with further momentum likely leading toward the 1.1000 psychological barrier.
– **Support sits near 1.0800 and 1.0760**, with the latter acting as a strong foundation in previous downturns.
– The pair is trading above its 50-day and 200-day Simple Moving Averages (SMA), suggesting bullish momentum remains intact.
### Fundamental Drivers
– **European Central Bank (ECB) divergence**: While the ECB is also expected to initiate its own easing cycle, markets believe it may move more cautiously than the Fed. As a result, EUR/USD still has room to strengthen.
– **Eurozone inflation and GDP data**: Recent stronger-than-expected HICP inflation readings and resilient economic growth numbers have reduced the urgency for ECB intervention in some analysts’ views.
According to ING analysts, the pair may continue to drift toward the 1.10 level if U.S. yield differentials keep narrowing.
## GBP/USD: Cable Breaks Higher on Rate Differential Outlook
The British pound has also found tailwinds as the softening U.S. dollar pushes the GBP/USD pair above the key 1.2700 resistance zone. The Bank of England (BoE), while expected to ease eventually, has refrained from signaling imminent policy action, which supports the pound in relative terms.
### Technical Overview
– **Resistance levels** stand at 1.275
Read more on USD/CAD trading.