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Economic landscape: Fed policy, investor sentiment, and EUR/USD dynamics

Fed policy, investor sentiment, and EUR/USD dynamics

Throughout 2024, investors have been consistently reassessing their expectations regarding potential interest rate cuts in the United States. Following each month, there has been a pattern of adjustment as new information emerges.

Notably, after the December communication from Jerome Powell, the Chairman of the US Federal Reserve (Fed), analysts reached a consensus that the first rate cut, likely to be 25 basis points, would occur in April. However, subsequent developments, including economic data releases and statements from the Fed, have caused these expectations to shift.

Initially targeted for April, then May, and presently, there is speculation even extending to July. Despite fluctuations in market sentiment and circulating rumors, our forecast remains steadfast: we anticipate the EUR/USD exchange rate to dip below 1.05 in this year, while the Fed will maintain its support for the US dollar.

The unexpectedly robust economic indicators emerging from the United States provide ample justification for the Federal Reserve's reluctance to acquiesce to market demands for interest rate reductions, particularly commencing from March of the current year.

These strong economic readings suggest that there is currently no compelling impetus for the Fed to initiate rate cuts, aligning its actions more closely with market expectations.

During the most recent press conference, Jerome Powell articulated the Federal Reserve's stance with clarity. Powell emphasized the necessity for the central bank to attain greater confidence in the trajectory of inflation returning to its predetermined target without encountering any disruptions before entertaining discussions regarding potential interest rate cuts.

This statement marks a notable departure from the optimistic outlook conveyed in December, wherein Powell expressed confidence in the US economy's ability to achieve a soft landing and effectively combat inflation.

Analysts caution against overly optimistic market sentiments, underscoring the Federal Reserve's prioritization of the Core Personal Consumption Expenditures (CPE) over the Consumer Price Index (CPI) readings released on Tuesdays.

While the CPI may indicate trends in inflation, the CPE provides a more comprehensive measure of inflationary pressures and consumer spending habits. Analysts highlight the challenges associated with combating inflation without inadvertently stifling economic growth.

Economic data emanating from the United States continues to defy expectations, spanning from the Non-Farm Payrolls (NFP) to GDP growth figures and inflation metrics.

This persistent pattern of positive surprises underscores the resilience and strength of the US economy amidst global uncertainties. Given this backdrop, it is anticipated that the US dollar will maintain its upward trajectory, with the EUR/USD exchange rate potentially reversing towards 1.05 and possibly reaching as low as 1.04 in the medium term.

The forecasted interest rate cuts are expected to materialize first within the eurozone before being adopted by the Federal Reserve. This prediction underscores the divergent monetary policy trajectories between the US and the eurozone.

Despite the dollar's dominance in the current landscape, ongoing stagnation in the eurozone's economy suggests that the dollar's supremacy is unlikely to be challenged until a discernible rebound occurs within the global manufacturing sector. Until such time, the dollar is poised to maintain its strength relative to the euro.

eurusd daily chart, forex analysis
EUR/USD daily chart, MetaTrader, 18.02.2024



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