The euro's position looks more confident than the dollar's | 19 August 2024

EURUSD:

EUR/USD is climbing to year-to-date highs having reached 1.1040 in the early European session on Monday. The decline in the US Dollar (USD) amid growing speculation that the Federal Reserve (Fed) will cut interest rates in September provides some support for the major pair. Traders will be keeping a close eye on Fed Chairman Jerome Powell's speech on Friday for further signals of a possible interest rate cut.

San Francisco Fed Chair Mary Daly said on Sunday that the latest US economic data gave her “more confidence” that inflation was under control, adding that it was time to consider adjusting borrowing costs from the current 5.25%-5.5% range. Meanwhile, Chicago Fed President Austan Goolsbee emphasized Sunday that U.S. central bank officials should be wary of maintaining restrictive policies longer than necessary. The dovish comments from Fed policymakers are putting pressure on the US Dollar and creating a tailwind for EUR/USD.

Investors now rate the probability of a quarter-point Fed rate cut in September at around 70%, while a minority of investors expect a half-point rate cut. Morningstar's chief U.S. economist Preston Caldwell noted that the CPI report “provides additional support for an aggressive Fed rate cut starting in September.” Caldwell believes that the rate will be cut by 25 bps to start, which would bring the Fed Funds rate down to 5.00-5.25%.

The Euro (EUR) remains strong as markets expect the European Central Bank (ECB) to gradually cut interest rates. ECB President Christine Lagarde emphasized at the latest press conference that policymakers “are not committing to a specific path of rate cuts.” The general consensus is that they will take a data-dependent and meeting-by-meeting approach.

Trading recommendation: Trade predominantly with Buy orders from the current price level

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