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Revising expectations: Federal Reserve's potential shift away from interest rate cuts in 2024


eurusd analysis,forex trading

According to Danske Bank analysts, the Federal Reserve (Fed) in the United States is likely to reconsider its earlier intentions to cut interest rates in 2024. This anticipated shift in policy is expected to significantly bolster the U.S. dollar across the global market. The bank’s economists forecast that the EUR/USD exchange rate will close the current year near 1.03. This projection is based on the assumption that the Fed will initiate its cycle of lowering interest rates later than other prominent central banks, placing it among the last to do so.


Danske Bank analysts have identified two primary reasons why they believe the Fed is not prepared to lower interest rates in 2024. The first reason is the robust condition of the U.S. labor market, which continues to demonstrate strength and resilience. Additionally, significant improvements in productivity have positively affected the outlook for structural economic growth. The second reason stems from a tightening in financial conditions that occurred following a period of relative easing at the end of 2023.



This shift has been marked by rising bond yields, a strengthening U.S. dollar, soaring commodity prices, and a partial reversal of recent stock market gains. Consequently, a continued divergence in the monetary policies of the European Central Bank (ECB) and the Fed is expected, which, when combined with favorable economic indicators from the U.S., should drive the EUR/USD exchange rate progressively lower, targeting a level of 1.03 by year’s end.


Market experts warn against overlooking subsequent hawkish statements from the U.S. central bank, particularly as the upcoming June decision is unlikely to mark a significant policy shift. The recent GDP data for the first quarter of 2024, which came in below expectations, along with clear signs of inflation in other economic reports, have led to a further decline in market expectations for interest rate cuts this year. These developments may potentially compel Jerome Powell, the Fed Chair, to adopt an even more hawkish stance in upcoming monetary policy decisions.



From a technical analysis standpoint, the EUR/USD exchange rate is currently in a consolidation phase, fluctuating between 1.0680 and 1.0750. This narrow trading range suggests that the currency pair is at a crossroads and must soon determine its future direction. Since the beginning of 2024, the trend has been predominantly bearish, but there has been a consistent increase in value since late 2023. The ultimate direction of the EUR/USD will likely hinge on forthcoming decisions regarding monetary policy from both the European Central Bank and the Federal Reserve.


Market consensus currently anticipates that U.S. interest rates will remain at their current levels at the upcoming Federal Reserve meeting on Wednesday. The process of reducing rates is not expected to commence until September of this year. It’s crucial to recognize, however, that market predictions regarding rate cuts have often been inaccurate. Earlier forecasts had incorrectly anticipated the first rate reduction to occur in March, followed by another prediction for April. Therefore, there remains uncertainty about whether any rate cuts will materialize this year, especially if upcoming U.S. economic data does not justify such adjustments.


eurusd analysis, forex trading
EUR/USD daily chart, MetaTrader, 29.04.2024

29.04.2024



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