EURUSD is skating on thin ice near the eight-week low of 1.0950 on Wednesday, with the major currency pair staying under pressure as the US Dollar gathers strength to extend its previous week’s rally further.
With the DXY Dollar Index hovering near a seven-week high around 102.60, the Dollar’s appeal has strengthened as traders have priced out expectations for the Federal Reserve to reduce interest rates again by 50 basis points (bps) in November.
Traders were forced to unwind Fed large rate-cut bets as the upbeat Nonfarm Payrolls (NFP) report for September diminished downside risks to economic growth and consumer spending. Also, dismal market sentiment due to Middle East tensions has improved the greenback’s appeal as a safe haven.
Financial markets expect the Fed to cut interest rates by 25 bps in the remaining two policy meetings this year, according to the CME FedWatch tool.
In Wednesday’s session, investors will pay close attention to the Federal Open Market Committee (FOMC) Minutes of the September meeting, to be released at 18:00 GMT. The FOMC Minutes will convey the views of all officials on the interest rate and the economic outlook.
In the September meeting, all members unanimously voted to start the policy-easing cycle with a 50-bps rate cut, except Fed Governor Michelle Bowman who favoured a smaller reduction of 25 bps.
Going forward, the major trigger for the Dollar will be the US Consumer Price Index (CPI) and the Producer Price Index (PPI) data for September, which will be published on Thursday and Friday, respectively.
The Euro faces selling pressure as traders have priced in more rate cuts by the European Central Bank.
The ECB is expected to cut its Deposit Facility Rate further by 50 bps to 3% by the year-end, suggesting that there will be a rate cut of 25 bps in each of the two policy meetings scheduled for next week and in December.
The ECB has already reduced its key borrowing rates by 50 bps this year as officials remain confident that inflation will return to the bank’s target of 2% in 2025. Market expectations for the ECB to cut interest rates further have been prompted by the declining trend in price pressures and the economic vulnerability in the Eurozone.
ECB policymaker and Governor of the Greek Central Bank Yannis Stournaras has also backed two more rate cuts in each of the remaining meetings this year and emphasised the need to reduce them further in 2025 as inflation continues to decelerate, in his comments to the Financial Times on Wednesday.
EURUSD chart by TradingView
(Source: OANDA)