Title: EUR/USD Rebounds as Fed Rate Cut Speculation Grows Following Softer PCE Inflation Report
Original Reporting by Eren Sengezer via FXStreet
The EUR/USD currency pair climbed on Thursday, September 26, 2024, as soft U.S. inflation data reignited investor expectations for the Federal Reserve to begin cutting interest rates in the near term. The pair rebounded after hitting seven-month lows earlier in the week, supported mainly by the release of the Personal Consumption Expenditures (PCE) Price Index, which showed a slower pace of inflation.
This article elaborates on the market reaction, underlying data, and implications for both the euro and the U.S. dollar. The momentum shift reflects larger macroeconomic currents, including central bank policy shifts, global growth dynamics, and evolving investor sentiment.
Key Highlights
– EUR/USD rose to above 1.0580 in Thursday’s European session and extended its gains into the New York session.
– The PCE Price Index was lower than expected, increasing speculation the Federal Reserve may refrain from further hikes and may even begin cutting rates in early 2025.
– Risk sentiment improved, weakening the U.S. dollar as investors moved into riskier assets.
– Yields on U.S. Treasury bonds took a dip, applying additional downward pressure on the greenback.
– The euro also found room to recover as traders viewed it as oversold after recent declines related to European economic uncertainty.
Understanding the PCE Data and Its Role in Fed Policy
The U.S. Bureau of Economic Analysis reported that the Core Personal Consumption Expenditures Price Index rose by just 0.1% month-over-month in August and 3.9% year-over-year. Both figures were slightly below market expectations.
The PCE Index is the Federal Reserve’s preferred measure of inflation, more so than the Consumer Price Index (CPI), because it better accounts for consumer behavior changes and has broader coverage.
– Headline PCE Inflation: 0.4% month-over-month, up from 0.2% in July.
– Core PCE (excludes food and energy): 0.1% month-over-month, down from 0.2%; year-over-year Core held at 3.9%, compared to forecasts of 4.0%.
– Real consumer spending, adjusted for inflation, slowed to 0.1% from 0.6% in July.
These figures highlight that inflation is gradually cooling without a dramatic decline in consumption. However, the data suggests that the Fed may not need to act aggressively with further rate hikes and that financial conditions may already be restrictive enough to pull inflation closer toward the 2% target over time.
Market Reaction
The EUR/USD rallied from lows around 1.0500 to test resistance near 1.0600, indicating a turn in short-term sentiment toward riskier assets and away from the dollar’s recent strength.
– The ICE U.S. Dollar Index (DXY), which measures the dollar against a basket of six major currencies (including the euro), dropped approximately 0.5% during the session.
– 10-year U.S. Treasury yields eased to 4.55% after hitting a high of 4.70% earlier in the week, reducing the appeal of U.S. bonds and the U.S. dollar.
– U.S. equity markets rebounded on the news, with major indices advancing as investors grew more optimistic that rate hike cycles may be nearing their peak.
Fed Expectations and Market Pricing
Market participants increasingly believe the Federal Reserve’s interest rate hiking cycle has concluded, barring a major inflationary surprise. Following Thursday’s PCE data, expectations for future rate cuts increased based on speculation that the economic data supports a more dovish Fed.
As of Friday:
– Fed Funds Futures showed less than a 20% chance the Fed would hike rates at the November or December 2024 meetings.
– Markets are currently pricing in
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