**EUR/USD Falls to Three-Month Low Amid Federal Reserve’s Hawkish Stance and Rising US Treasury Yields**
*Adapted from an article by FXStreet, originally written by Christian Borjon Valencia*
The EUR/USD currency pair dropped to a three-month low as markets responded to the Federal Reserve’s latest policy statement and Fed Chair Jerome Powell’s comments, which signaled a persistent hawkish stance. The continued strength of the US dollar, fueled by rising US Treasury yields and ongoing economic optimism, has placed heavy downward pressure on the euro.
Throughout October, the US dollar experienced a notable rally due to growing consensus that US interest rates would remain elevated for an extended period. This outlook was further cemented by the Fed’s decision on Wednesday to hold rates steady while maintaining a strongly hawkish policy tone, suggesting that officials are not yet done with tightening if inflation persists above target levels.
This overall narrative has resulted in increased investor confidence in the dollar and diminishing demand for the euro, pushing EUR/USD to its lowest levels in three months.
### Fed Policy Update: Rates on Hold, Hawkish Message Prevails
On October 31, 2024, the US Federal Reserve concluded its two-day Federal Open Market Committee (FOMC) meeting with the decision to leave the federal funds rate unchanged in a range of 5.25% to 5.50%. This marks the second consecutive meeting where the Fed refrained from raising rates after July’s quarter-point hike.
Key points from the Fed meeting and Powell’s press conference:
– The Fed emphasized the importance of incoming economic data in guiding future monetary policy.
– Inflation remains too high, even though there has been modest progress toward the 2% target.
– Labor market conditions, while cooling modestly, are still strong.
– The central bank noted that robust economic activity may warrant further policy tightening if necessary.
– Powell highlighted that the Fed is prepared to hike again if inflation fails to continue its downward trend in a “sustainable” manner.
– Although the Fed’s tone was firm, Powell suggested they are “proceeding carefully,” recognizing potential risks of overtightening in an environment where the US economy shows resilience but faces international uncertainties.
The message was clear: no immediate rate hikes, but no rate cuts on the horizon either. This cautious but resolute language boosted US yields and, in turn, the dollar.
### US Treasury Yields Spike, Supporting the Greenback
Following the Fed statement, US Treasury yields surged. The 10-year yield returned to above 4.90%, marking a significant rebound from the prior week’s lows. The 2-year yield also climbed, reflecting reinforced market expectations of higher rates for a longer period.
Rising Treasury yields benefit the US dollar because:
– They make USD-denominated assets more attractive due to better returns.
– They contribute to a tightening of financial conditions, which supports the Fed’s inflation-fighting objectives.
– Foreign capital tends to flow into US bonds, increasing demand for the dollar and decreasing the appeal of lower-yielding currencies like the euro.
### Euro Under Pressure as Eurozone Economic Outlook Weakens
While the US economy shows signs of robust resilience, the eurozone faces mounting economic headwinds, which further compounds euro weakness.
Recent eurozone data highlights:
– The bloc’s inflation slowed to 2.9% in October, its lowest level in over two years, increasing expectations that the European Central Bank (ECB) will hold, or may even begin considering rate cuts in 2024.
– The eurozone economy contracted by 0.1% in Q3 2024, according to flash GDP estimates. This performance lagged behind expectations and sparked fears that the eurozone may enter a technical recession.
– Germany, the region’s largest economy, continues to struggle with industrial weakness, declining exports, and lower consumer spending.
These factors sharply contrast with the US outlook, where GDP grew by a notable 4.9% in Q3.
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