**EUR/USD Climbs as Fed Rate Cut Speculations Gain Ground Following PCE Data**
*By FXStreet staff, adapted and expanded from original reporting by Christian Borjon Valencia*
The EUR/USD currency pair showed notable strength during the North American trading session on Thursday, supported by fresh U.S. economic data that shifted market expectations regarding future Federal Reserve interest rate decisions. The core driver behind the euro’s upturn was the Personal Consumption Expenditures (PCE) Price Index report—arguably the Federal Reserve’s preferred inflation metric.
Investors reevaluated their projections around rate cuts as the latest U.S. inflation figures came in softer than expected, leading to a weakening U.S. dollar and supporting risk-sensitive currencies such as the euro. Coupled with recent dovish commentary from Fed officials and a favorable economic backdrop in the eurozone, the EUR/USD surged briefly past the 1.0900 level before settling just below it.
This article breaks down the key drivers behind EUR/USD’s movement, updates market expectations for U.S. monetary policy, and evaluates the potential trajectory for the currency pair heading into Q4 2024.
## Key Developments Moving the EUR/USD Pair
### 1. Softer-than-Expected PCE Inflation Data
The U.S. Department of Commerce reported that the Core PCE Price Index—the Fed’s preferred gauge for consumer inflation—eased in August:
– The Core PCE rose by 0.1% month-over-month, slightly under the 0.2% consensus estimate.
– On an annualized basis, Core PCE increased by 2.6%, down from July’s 2.9%.
– Headline PCE also moderated to 2.5% year-over-year.
These readings fueled expectations that inflationary pressures are cooling in the U.S. economy, potentially giving the Fed room to consider easing interest rates later in the year.
### 2. Reinforced Fed Rate Cut Bets
With inflation appearing more subdued, traders increased their bets that the Fed might lower rates sooner than previously anticipated. According to the CME FedWatch Tool:
– Market pricing on Thursday suggested a 74% probability of a Fed interest rate cut by the September meeting.
– The odds of a cut in July also increased significantly, though they remain below 50%.
Notably, federal funds futures now reflect two full quarter-point cuts in 2024, compared to just one cut that was expected earlier this month.
### 3. Dovish Fed Commentary
Adding fuel to the prospect of cuts, several members of the Federal Reserve sounded conciliatory tones this week:
– New York Fed President John Williams stated that interest rates would eventually come down, though he cautioned that economic data will guide that decision.
– Atlanta Fed’s Raphael Bostic also signaled that monetary policy is sufficiently restrictive and the bank could begin considering rate reductions if inflation continues to fall.
These statements align with Fed Chair Jerome Powell’s earlier remarks suggesting patience and a data-dependent path forward.
### 4. Eurozone Economic Optimism
Simultaneously, economic indicators in the euro area signaled modest improvement, with recent data on business sentiment and manufacturing showing stabilization.
– The Eurozone Composite PMI for August, published earlier in the week, rose to 47.9 from 47.0 in July, although still below the 50.0 threshold signaling expansion.
– European Central Bank policymakers reiterated that they are unlikely to ease monetary policy until inflation sustainably drops toward their 2% target.
Christine Lagarde, President of the ECB, acknowledged that while inflation remains too high, there are signs of disinflation pressures spreading across the economy. Still, the bank is inclined to maintain current interest rate levels into early 2025.
## EUR/USD Technical Analysis
The EUR/USD currency pair initially spiked following the data release, rising above the 1.0900 level before retreating slightly as profit-taking emerged ahead of the weekly market close. From a chart
Read more on USD/CAD trading.