The EUR/USD pair continued its upward momentum on Monday, trading around 1.0520 during the Asian session. The pair’s gains are largely attributed to the weakening US Dollar (USD), which has been pressured by soft US Treasury yields ahead of the Federal Reserve’s (Fed) upcoming interest rate decision on Wednesday.
Fed Rate Cut Expectations Drive USD Weakness
The Federal Reserve is widely anticipated to announce a 25 basis point rate cut during its final monetary policy meeting of 2024. Market analysts expect the central bank to reduce rates while signaling a potential pause in its tightening cycle, given the strong performance of the US economy and inflation persistently above the 2% target. According to the CME FedWatch Tool, markets are almost fully pricing in this quarter-point cut.
Additionally, all eyes will be on Fed Chair Jerome Powell’s press conference and the release of the central bank’s updated Dot Plots. Earlier this month, Powell struck a cautious tone, emphasizing the need for patience in finding a neutral rate stance. His comments suggest that the Fed is in no rush to lower rates further, despite expectations of a cut this week.
Political Stability Boosts the Euro
The Euro found additional support following French President Emmanuel Macron’s appointment of centrist ally François Bayrou as Prime Minister. This move was seen as a step toward political stability in France after Michel Barnier resigned following a confidence vote in Parliament. Macron had pledged to quickly fill the role, and Bayrou’s appointment has raised hopes for smoother governance.
ECB Comments Add to Divergence with Fed
On the European front, the Eurozone’s economic outlook received a mixed signal from European Central Bank (ECB) policymaker Robert Holzmann. In a recent interview, Holzmann stated that cutting rates solely to stimulate economic growth would be a mistake. He emphasized that the ECB’s primary responsibility is to maintain price stability rather than to drive economic growth. His remarks highlight the ECB’s more cautious approach compared to the Fed, which is expected to reduce rates this week, further fueling the divergence between the two central banks and supporting the Euro.
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