**EUR/USD Hits Three-Month Low as US Dollar Strengthens on Hawkish Fed Stance**
*By Yohay Elam, originally published on FXStreet*
On October 31, 2024, the euro weakened sharply against the US dollar, with the EUR/USD pair plunging to its lowest level in over three months. The sharp decline in the currency pair came as markets digested the latest policy signals from the Federal Reserve. Investors interpreted the Fed’s communication as hawkish, reinforcing expectations for higher interest rates to persist for longer. This sentiment spurred a broad rally in the US dollar, while the euro remained under pressure amid weak economic data from the Eurozone and cautious rhetoric from the European Central Bank (ECB).
This article will explore the key factors contributing to the fall in EUR/USD, including monetary policy dynamics, recent economic data, and technical analysis signals pointing to further downside risk for the pair.
**Fed Holds Rates but Sends a Hawkish Message**
The Federal Reserve, at the conclusion of its two-day policy meeting on October 31, decided to leave its benchmark interest rate unchanged. This was in line with broad expectations, as the central bank had signaled in recent months that its aggressive rate-hiking campaign was nearing an end. However, the Fed’s accompanying statement and press conference took on a decidedly more hawkish tone, surprising markets.
Key highlights from the Fed’s announcement included:
– The Federal Open Market Committee (FOMC) kept the federal funds rate in the range of 5.25% to 5.50%, where it has stood since July 2023.
– Fed Chair Jerome Powell reiterated the central bank’s commitment to its 2% inflation target, indicating the Fed is not yet fully convinced that inflation pressures have been tamed.
– Powell emphasized that while inflation has come down since its peak, it remains above the target, and further evidence of sustained disinflation is needed before policy easing will be considered.
– The Fed noted recent stronger-than-expected US economic data as a rationale for maintaining a tight policy stance.
This messaging reinforces the idea that the “higher for longer” policy posture is here to stay. Rising bond yields and risk-off sentiment followed Powell’s comments. For FX markets, this renewed optimism about dollar yields translated into increased demand for the greenback, resulting in broad-based US dollar strength.
**US Economic Data Continues to Impress**
Recent economic data from the United States has supported the Fed’s hawkish narrative:
– Q3 GDP grew at an annualized pace of 4.9%, surpassing economist forecasts and pointing to robust consumer and business activity despite high borrowing costs.
– The core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation metric, has remained sticky above the 3% mark, stoking concerns that inflation could remain persistent.
– The US labor market continues to show resilience, with weekly jobless claims hovering near historically low levels and strong monthly payroll gains, underscoring the economy’s strength.
These indicators support the case for the Fed to keep rates steady in restrictive territory for an extended period. The potential for future rate hikes, although not guaranteed, cannot be ruled out.
**Dollar Bulls Regain Control**
The US Dollar Index (DXY), which tracks the greenback against a basket of major global currencies, surged above 106 points following the Fed policy decision. This level marks a near one-month high. The index is now back on a bullish trajectory, with mounting expectations that US yields, particularly at the long end of the curve, will remain elevated.
Key reasons behind the dollar’s recent strength include:
– Hawkish Fed rhetoric making dollar-denominated assets more attractive to investors seeking yield.
– Safe-haven demand amid heightened geopolitical tensions and global growth concerns.
– Weak data from other major economies, such as the Eurozone and China, pressuring their currencies lower and lifting the dollar by default.
**Euro Declines Amid Weak Eurozone Activity
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