Euro to Dollar Exchange Rate Tests 1.05

November 17, 2024 - Written by David Woodsmith

STORY LINK Euro to Dollar Exchange Rate Tests 1.05

Instead of confirming a December cut was likely, Powell has introduced uncertainty.

The odds of a cut are now around 50/50.

The dollar made new 2024 highs on Thursday and pushed EURUSD down to 1.05.

The post-election rally had already started to fade by the time Fed Chair Powell spoke on Thursday. Stock markets peaked on Monday and drifted lower, while Bitcoin reversed on Wednesday. This may be have driven by profit taking, but Powell’s speech introduced a bearish tone to the selling.

It was thought Powell may repeat the same dovish message from the FOMC meeting last week, specifically that inflation was heading in the right direction despite a bumpy path. However, his message was surprisingly hawkish as he highlighted the Fed would be in “no rush” to cut rates. This was interpreted to mean a December cut might not happen and the odds shifted from over 80% to near 50%. This uncertainty upset stocks which accelerated lower into Thursday’s close. During Friday’s European session they were lower again with S&P500 futures down –0.6%. The US dollar, meanwhile, reached new 2024 highs on Thursday but is pulling back slightly on Friday. Yields were surprisingly flat, but the 10Y did make new rally highs before pausing.

Powell Introduces Doubt Over the Next Cut

If the Fed wanted to give markets some clarity and calm, they went the wrong way about it. Ahead of Powell’s speech there was a reasonable consensus a December cut was due. If he gave any further hints, the odds would have likely risen to 90% and stayed there into the December meeting, meaning volatility would stay low.

However, Powell veered from the expected script and markets are adjusting sharply.

“Powell said at a Dallas Fed event that with the economy still growing, the job market solid and inflation still above the 2% target, the Fed can deliberate carefully on rate cuts,” noted Reuters.

“Powell seemed to put greater emphasis on the strength of the economy and how that allows the central bank to approach the upcoming policy decisions “carefully”. Market expectations for a cut in December declined by around 5bp after his comments and are now at 15bp,” wrote ING on Friday.

Perhaps this week’s inflation data factored into the change in Powell’s tone. Core CPI stayed at 0.3% for the third month in a row, which is too high for inflation to get down to the Fed’s 2% target. Both CPI and PPI were in line with estimates, but higher than ideal.

With a December cut now 50/50, data will have heightened importance and shift the odds. Next month’s CPI is due the week before the FOMC so could be critical. This will lead to some large market moves.

EURUSD Tests 1.05

EURUSD may find some support around the 1.05 area which marked the low in 2023. However, there is not much optimism of a sustainable bottom given the Fed’s relative hawkishness and the ECB’s rush to get rates lower. Whether or not they cut by 50bps in December could decide the next major move.

“Our view remains that a 50bp move in December remains very much possible, and we expect a bearish impact on the euro given markets are pricing in just over 30bp,” note ING.

The ECB’s decision could be complicated by the recent weakness in the euro. EURUSD is heading back near parity and EURGBP is trading near 0.83 which is back at April ‘22 levels. While they will surely want to get rates to neutral as fast as possible, they will also want to avoid triggering a further crash. A 25pbs cut is still the most likely move.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Euro Dollar Forecasts