**EUR/USD Rebounds Amid Rising Fed Rate Cut Expectations Following Lower U.S. PCE Data**
*Based on original reporting by FXStreet*
The EUR/USD currency pair regained traction on Thursday, propelled by renewed dovish expectations surrounding the Federal Reserve’s monetary policy outlook. The rebound occurred as U.S. consumer inflation data, as measured by the Personal Consumption Expenditures (PCE) Price Index, came in softer than expected, reinforcing market expectations that the Fed may begin easing interest rates later in 2024.
The euro’s recovery from recent lows highlights not only the influence of U.S. data on global currencies but also growing confidence among market participants that the Federal Reserve has likely reached the peak of its tightening cycle.
**PCE Indicator Sparks Market Reassessment**
The Core Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred gauge to track inflation trends, showed signs of cooling. For August, the Core PCE rose by just 0.1% month-over-month, below the consensus estimate of 0.2%. Year-over-year, the index printed a 3.9% gain, continuing a gradual downtrend from previous readings.
Key takeaways from the PCE release:
– Core PCE (MoM): 0.1% (Forecast: 0.2%)
– Core PCE (YoY): 3.9% (Previous: 4.2%)
– Headline PCE (YoY): 3.5%
– Personal Income (MoM): +0.4%
– Personal Spending (MoM): +0.4%
The cooler-than-expected inflation data immediately weighed on the U.S. Dollar, as traders adjusted their expectations around future Federal Reserve actions. Given that inflation remains above the Fed’s 2% target but is clearly moderating, speculation intensified that the central bank may not pursue additional rate hikes and could pivot toward easing in the first half of 2024.
**Fed Policy Outlook: Market Expects Easing Ahead**
With inflation showing signs of tapering and economic growth slowing modestly, markets are increasingly pricing in a Fed pivot in 2024. According to the CME FedWatch Tool:
– The probability of a rate cut in May 2024 has risen to over 40%.
– Odds for a first rate cut by June 2024 now surpass 60%.
– The likelihood of another hike before the end of 2023 stands below 20%.
This market sentiment is mirrored in U.S. Treasury yields. Following the PCE data:
– The 10-year U.S. Treasury yield fell to around 4.57%, a decline of over 5 basis points on the day.
– The 2-year yield, sensitive to short-term rate expectations, dropped to 5.03% from 5.12% earlier in the week.
Falling yields translate to reduced demand for the U.S. Dollar, prompting EUR/USD to find support near 1.0550 before bouncing above 1.0600.
**EUR/USD Reclaims Ground: Technical and Sentiment Factors Aligned**
In Thursday’s New York session, EUR/USD climbed toward the 1.0620 area, breaking a short-term downtrend that dominated much of September. Several contributing factors align to support the euro’s recovery:
– Moderating U.S. inflation reduces Fed’s tightening bias.
– U.S. Dollar Index (DXY) pulls back from recent high above 107, easing pressure on euro.
– Signs of stabilization in Eurozone data, including consumer confidence and inflation expectations.
– End-of-month position squaring added to short squeeze.
From a technical standpoint, EUR/USD has shown notable resilience:
– The pair bounced off a strong support zone near 1.0500.
– RSI on the daily chart has reversed from oversold territory, with room for further upside.
– A break above 1.0630 could open the door to a retest of 1.
Read more on USD/CAD trading.