**EUR/USD Slides to Three-Month Low as Fed’s Hawkish Stance Strengthens US Dollar**
*Based on original reporting by Christian Borjon Valencia for FXStreet*
The euro has continued to deteriorate against the US dollar, with the EUR/USD currency pair reaching its lowest point in over three months. This slide comes amid increasing investor confidence in the US economy, powered by a persistently hawkish tone from the U.S. Federal Reserve during its latest interest rate policy announcements. Analysts and traders widely interpreted the Federal Open Market Committee’s (FOMC) rhetoric as signaling higher-for-longer interest rates, thereby driving robust demand for the greenback and undermining the euro.
Let’s explore the various factors driving the sharp move in EUR/USD, including macroeconomic data, central bank policy, investor sentiment, and technical implications.
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**Fed Maintains Hawkish Outlook Despite Holding Rates**
At its October 31, 2024 meeting, the Federal Reserve chose to keep its benchmark interest rate in a range between 5.25% and 5.50%, leaving rates unchanged for the second consecutive meeting. However, it was not the decision itself that startled markets, but rather the unwaveringly hawkish tone adopted by Fed Chair Jerome Powell during the post-meeting press conference.
Key messages from Powell and the Fed:
– While inflation has decreased from its peak, it remains “too high”
– Additional rate hikes remain on the table if inflationary pressures persist
– Economic activity remains strong, with GDP growth projections being revised upward
– Labor market shows signs of slowing, but remains tight by historical standards
Despite no immediate hike in October, Powell emphasized that the central bank is not yet confident that inflation has returned to its 2% goal on a “sustained basis.” He further stated that “monetary policy is likely to remain restrictive for some time.” This commentary reinforced the message that rate cuts are unlikely in the short term, boosting bond yields and lending further strength to the US dollar.
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**US Dollar Regains Momentum as Treasury Yields Rise**
The market’s response was swift. Yields on U.S. Treasury securities climbed sharply again, particularly on the 10-year and 2-year notes. Rising yields enhance the appeal of dollar-denominated assets, making the greenback more attractive from a return perspective compared to other currencies, particularly those hampered by dovish monetary policies, such as the euro.
As a consequence:
– The U.S. Dollar Index (DXY), which measures the dollar against a basket of major currencies, rose by more than 0.6% following the FOMC meeting
– The EUR/USD dropped to as low as 1.0530, the lowest since mid-July 2024
– Short-term traders and hedge funds increased dollar-long positions, betting on further euro weakness
According to data from the Commodity Futures Trading Commission (CFTC), speculative net long positions in the U.S. dollar have increased over the past two weeks. The broader market appears to be factoring in prolonged monetary tightening by the Fed, especially in contrast with the European Central Bank’s more cautious stance.
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**ECB Holds Rates, Signals End of Hiking Cycle**
In contrast to the Federal Reserve, the European Central Bank (ECB) opted to pause its monetary tightening during its most recent policy announcement in October. President Christine Lagarde conveyed a more neutral and data-dependent tone during her remarks. While inflation in the Eurozone has cooled, economic growth remains stagnant or even contractionary across many member states.
Key points from the ECB’s recent decision:
– The ECB held its key deposit rate steady at 4.00 percent, a level reached after 10 consecutive hikes
– Officials indicated that interest rates are now at levels considered sufficiently restrictive
– Lagarde emphasized a cautious approach to future decisions, stating they would be “data-dependent”
The divergence between the Fed’s hawkish stance and the ECB’s cautious pause has exerted considerable pressure on
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