**US Dollar Weakens Ahead of Powell’s Fed Guidance: Overview of EUR/USD and GBP/USD Trends**
*By James Hyerczyk | Source: FX Empire (original article link)*
The US dollar experienced a period of weakness at the beginning of the week, as traders awaited key comments from Federal Reserve Chair Jerome Powell regarding the central bank’s future interest rate policies. With fluctuations in major currency pairs like the EUR/USD and GBP/USD gaining momentum, the market shifted its focus toward upcoming economic data and policymaker statements to determine the direction of the greenback.
This article provides an expanded analysis of the drivers behind the dollar’s retreat, examines the performance of the euro and the British pound, and discusses what market participants can expect in the coming days.
**US Dollar Index Declines on Transition of Market Sentiment**
The US Dollar Index, which tracks the performance of the dollar against a basket of six major currencies, pulled back modestly in recent trading. Although near its eight-week high last reached in mid-May, the index saw selling pressure as traders reassessed the likelihood of prolonged high interest rates.
Several key forces contributed to this change in sentiment:
– **Economic Data Surprises:** Last week featured a number of strong US economic reports, especially in job growth and inflation, which initially helped bolster the dollar. However, markets are now cautious about whether this data will influence the Federal Reserve’s long-term strategy.
– **Profit-Taking Ahead of FOMC Meeting:** With the Federal Open Market Committee (FOMC) meeting and updated economic projections due this week, many traders opted to lock in gains made over the previous few weeks.
– **Expectations of Dovish Guidance:** There is growing speculation that Chair Jerome Powell may take a more cautious tone in his upcoming remarks, which would suggest a slower approach to further rate hikes or an openness to cuts later in the year.
**Key Federal Reserve Communication Drivers**
Investors are monitoring several events that could influence the dollar:
– **FOMC Interest Rate Decision (Wednesday):** Markets expect the Fed to leave interest rates unchanged in June, holding in a range of 5.25% to 5.5%. However, the statement accompanying the decision and Powell’s post-meeting press conference could alter this expectation.
– **Dot Plot Projections:** A central focus will be the updated Summary of Economic Projections, including the “dot plot” that illustrates Fed officials’ views on future interest rate paths.
– **Powell’s Press Conference:** Any signals about the timing or quantity of potential rate cuts later in 2024 will have material implications on future dollar strength or weakness.
**Labor Market Strength and Implications for Inflation**
The Non-Farm Payroll (NFP) report released last week showed that the US economy added 272,000 jobs in May, significantly exceeding expectations. This robust labor market data supports the case for the Fed to remain hawkish, as strong employment levels can keep consumer spending — and inflation — elevated.
However, not all Fed officials have responded by favoring continued policy restraint. While some members maintain that further rate hikes are necessary or that rates should be kept high for longer, a growing number are open to one or even two rate cuts before the end of 2024 if inflation moderates in line with forecasts.
**EUR/USD: Euro Moves Higher Against the Dollar**
The EUR/USD currency pair rose slightly during Monday’s trading sessions, supported by dollar weakness and a cautious tone from the European Central Bank (ECB). The pair had previously hit a low of 1.0800, but has recently rebounded toward the 1.0770-1.0780 area, regaining some lost ground.
Several factors contributed to the euro’s recent price movements:
– **ECB Decision to Cut Rates:** Last week, the European Central Bank initiated its long-expected rate cut, decreasing its main interest rate by 25 basis points. While this generally weakens a currency, markets had already priced
Read more on EUR/USD trading.