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Currency market update: Dollar stays strong on Powell's rate cut caution

Dollar stays strong on Powell's rate cut caution

The dollar is holding steady on Thursday, remaining close to a seven-week high against the euro. This comes after Federal Reserve Chairman Jerome Powell dismissed the notion of lowering interest rates in the USA as early as March.

The U.S. Dollar Index, which gauges the currency against a basket of six major competitors including the euro, yen, and British pound, strengthened on Wednesday and continued to add nearly 0.2% to its value on Thursday morning.

The index is hovering around local highs, testing 103.7, and is consistently contending with the 200 EMA, a resistance zone since January 17. The dollar's strength is underpinned by encouraging U.S. economic data, hinting that the Federal Reserve may opt to delay any interest rate cuts.

Powell provided further support to the dollar by expressing skepticism about a rate cut in March during a press conference held after the Fed decided to keep interest rates unchanged.

While the Fed refrained from altering interest rates, they abandoned the long-standing reference to possible additional external financing cost hikes.

Investors are currently pricing in a 38% chance of the Fed lowering interest rates in March, down from 59% prior to the central bank's decision. This probability has significantly decreased from 89% a month ago. However, the market still anticipates nearly 150 basis points of rate cuts throughout the year.

The Fed's reluctance to specify the timing of potential rate cuts is keeping the markets on edge. The dollar's exchange rate is likely to benefit from this delay, although the market's anticipation of prospective cuts later in the year may ultimately erode the dollar's resilience.

Meanwhile, the euro has experienced a 0.12% decline, reaching $1.0805 and approaching Wednesday's minimum of $1.0795. This marks the euro's weakest level since December 13. The evolving dynamics in the currency market reflect the delicate balance between economic indicators, central bank decisions, and market sentiment.

eurusd daily chart, forex trading analysis
EUR/USD, daily chart, MetaTrade, 1.02.2024



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