The EUR/USD currency pair surged to a year-to-date high near 1.1040 during the early European trading session on Monday, buoyed by a softer US Dollar (USD). Growing speculation that the Federal Reserve (Fed) may cut interest rates in September has provided significant support to the euro against the dollar.
Market participants are keenly awaiting Fed Chair Jerome Powell’s upcoming speech on Friday, hoping for more definitive signals regarding potential rate cuts. The anticipation follows dovish remarks from several Fed officials over the weekend, which have intensified selling pressure on the dollar.
San Francisco Fed President Mary Daly expressed increased confidence on Sunday that inflation is under control, suggesting it may be time to consider adjusting borrowing costs from the current range of 5.25% to 5.5%. Similarly, Chicago Fed President Austan Goolsbee cautioned that the central bank should avoid maintaining restrictive policies longer than necessary.
These dovish signals have led investors to price in a roughly 70% probability of a quarter-point rate cut by the Fed in September, with some even anticipating a half-point reduction. Preston Caldwell, Chief US Economist at Morningstar, noted that the latest Consumer Price Index (CPI) report supports the case for aggressive rate cuts, beginning with a 25 basis point reduction, which would bring the Fed Funds rate down to 5.00-5.25%.
Meanwhile, the Euro (EUR) has remained strong, as markets expect the European Central Bank (ECB) to adopt a more cautious approach to rate reductions. ECB President Christine Lagarde emphasized at the latest press conference that the ECB is committed to a data-dependent and meeting-by-meeting approach, refraining from pre-committing to any specific rate path.
This divergence in central bank strategies continues to drive the EUR/USD pair higher, with the euro gaining momentum as the dollar weakens.
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