Title: EUR/USD Hits Three-Month Low as Fed’s Hawkish Stance Drives US Dollar Surge
Author: Based on reporting by Christian Borjon Valencia for FXStreet
Additional data sourced from Bloomberg, Reuters, and CNBC
In recent trading sessions, the euro (EUR) has come under pronounced selling pressure against the US dollar (USD), with the EUR/USD pairing sliding to a three-month low following the US Federal Reserve’s notably hawkish commentary. The persistent strength of the US dollar, driven by the Federal Reserve’s commitment to maintaining higher interest rates for an extended period to combat inflation, has weighed heavily on the euro and broader currency markets.
The latest drop in EUR/USD reflects a combination of economic indicators, monetary policy divergence between the United States and the eurozone, and global geopolitical jitters that have fueled the greenback’s safe-haven appeal.
Key Developments Affecting EUR/USD:
– The EUR/USD currency pair fell to 1.0530, its lowest level since mid-July.
– The Federal Reserve maintained its benchmark rate at 5.25%–5.50%, but signaled readiness for future hikes.
– Economic data in the U.S. shows continued resilience, reinforcing prospects for elevated rates.
– The European Central Bank (ECB), in contrast, has struck a more cautious tone, pausing rate hikes due to weakening eurozone growth.
– Rising U.S. Treasury yields and broad-based dollar appreciation have further pressured the euro.
– Market participants are increasingly diverging on expectations for Fed and ECB policy paths.
Federal Reserve’s Impact
At its latest policy meeting held on October 31, 2024, the Federal Open Market Committee (FOMC) decided to leave interest rates unchanged but emphasized that the monetary policy stance remains restrictive. Federal Reserve Chair Jerome Powell stated during the post-meeting press conference that the Fed is “prepared to raise rates further if warranted” and that inflation remains high, particularly in the services sector.
Key Takeaways from the Federal Reserve’s Messaging:
– Powell reiterated the Fed’s data-dependent approach, indicating potential for further policy tightening.
– Inflation remains persistent, especially in services and housing components.
– Labor market displays signs of cooling but remains relatively strong.
– Recent GDP growth of 4.9% year-over-year in Q3 outpaced expectations, suggesting the U.S. economy remains resilient.
– Fed officials revised interest rate projections in the September Summary of Economic Projections (SEP), showing median estimates for one more hike in 2024 and no cuts until at least the second half of 2025.
The hawkish outlook solidifies the Fed’s position as one of the more aggressive major central banks, directly fueling the dollar rally. According to the CME FedWatch Tool, futures markets are pricing in a nearly 30% chance of a hike in early 2025, underscoring that market participants share Powell’s concerns over persistent inflation risks.
Consequently, the US Dollar Index (DXY), which measures the dollar against a basket of six major currencies, continued pushing higher, recently crossing the 107 mark and reaching highs not seen since November 2022.
US Treasury Yields Bolster Dollar
Another key factor supporting the greenback is the rise in US Treasury yields. The 10-year yield has climbed above 4.90%, enhancing the appeal of dollar-denominated assets. This move reflects expectations for “higher for longer” interest rates and robust economic conditions in the United States.
– The 2-year yield hit 5.10%, signaling tight financial conditions.
– The spread between 10-year and 2-year yields remains negative, an indication of ongoing inversion in the yield curve, typically seen as a recession indicator, though its timing has proven elusive in this cycle.
European Central Bank’s Dovish Posture
In stark contrast to the Fed, the ECB has adopted a more restrained approach. At its latest meeting, the ECB left interest rates unchanged for the first time in 10 policy
Read more on USD/CAD trading.