Original Author: Anil Panchal (FXStreet)
Title: EUR/USD Under Pressure Below 1.1550 as Fed Rate Cut Expectations Diminish
The EUR/USD currency pair remains subdued below the 1.1550 level, extending its recent pullback from near-term highs after the Federal Reserve’s latest policy signals dampened market expectations for a near-term interest rate cut. Investor sentiment continues to shift as robust U.S. economic data and hawkish commentary from central bank officials drive demand for the U.S. dollar, weighing on the euro.
With reports emerging that the Federal Reserve may hold interest rates higher for longer due to persistent inflationary pressures, the euro faces renewed selling pressure. Here is a comprehensive breakdown of the current market dynamics, contributing factors, and potential outlook for EUR/USD.
Key Drivers Behind EUR/USD Weakness
Several fundamental catalysts have led to EUR/USD holding losses below the 1.1550 psychological level:
• Less Dovish Fed: Comments from Federal Reserve Chair Jerome Powell and recent macroeconomic data have indicated that the central bank is not in a hurry to cut rates. This shift reduces bearish bets on the U.S. dollar.
• Strong U.S. Economic Data: The recent releases from the U.S., including labor market strength and service sector expansion, support the Fed’s hawkish stance.
• Divergence in Monetary Policy: While the European Central Bank (ECB) remains cautious about economic risks in the eurozone, the Fed’s hawkish tone places upward pressure on the U.S. dollar.
• Bearish Technical Momentum: Technical indicators point towards continued bearish stability below the 1.1550 level, reinforcing short-term downward pressure.
Federal Reserve Policy Outlook
The Federal Reserve kept its benchmark federal funds rate unchanged in its latest November 2024 meeting at the range of 5.25% to 5.50%, as widely expected. Markets were initially leaning towards a slightly dovish interpretation, but Powell’s post-meeting press conference quickly tempered such hopes.
Key Takeaways:
• Powell emphasized the Fed’s readiness to raise rates further if needed, noting that inflation remains elevated and job market conditions resilient.
• The central bank continues to prioritize a “data-dependent” approach, cautioning that monetary conditions are not yet sufficiently restrictive to guarantee a return to the 2% inflation target.
• Rate futures suggest that traders have now pushed expectations for the Fed’s first rate cut well into the second half of 2025 rather than early in the year as previously forecasted.
The tone effectively countered any immediate expectations for easing, pushing treasury yields higher, particularly at the short end of the curve. The 2-year U.S. Treasury yield rose to near 5%, offering increased attractiveness for dollar-denominated assets.
Economic Data Supporting the U.S. Dollar
Recent economic releases from the United States continue to lend support to the greenback and keep the euro on the defensive. Key data points include:
• ISM Services PMI: The index for October 2024 came in at 51.8, beating expectations and reaffirming moderate expansion in the U.S. service sector.
• Nonfarm Payrolls: The U.S. added 187,000 jobs in October, above estimates of 180,000, indicating ongoing strength in labor markets.
• Average Hourly Earnings: Wage growth remained robust, a sign of sustained consumer spending potential that could keep inflation pressures alive.
These indicators reduce the urgency for the Fed to pivot to rate cuts and support a higher-for-longer narrative for interest rates.
ECB Remains Cautious Due to Eurozone Weakness
On the other side of the Atlantic, the European Central Bank has signaled that it may have reached the end of its tightening cycle. Although it kept rates unchanged at 4% during its last policy meeting, President Christine Lagarde and other policymakers have acknowledged growing downside risks to growth within the eurozone.
Factors Contributing to a Dovish ECB Outlook:
• Stagnant GDP
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