Could interest rate cuts threaten the dollar’s rise? Euro at decisive point

• On Friday, inflation data was in line with market expectations, while Powell’s statements had limited impact on investor sentiment;
• The debate has increased about a possible interest rate cut in the US from June onwards.
• The dollar’s performance against major currencies, especially the euro, depends on the monetary policies of the Fed and the ECB.
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On the last business day of the week, the conformity of data with projections, added to Powell’s cautious statements regarding the reduction of interest rates, did not cause major changes in the markets. Thus, the US dollar index () remained stable with the advent of the new week.

After the release of data in the previous week, expectations of an imminent rate cut by the (Fed, American central bank) in June grew, indicating a 60% probability for an adjustment of 25 basis points.

Investors remain expecting three rate cuts throughout the year, with some analysts not ruling out the possibility of up to five reductions, depending on the next employment indicators.

The Fed’s stance, based on data-driven decisions, puts the next employment indicators () in the spotlight. A significant drop in employment numbers could accelerate interest rate cuts.

Despite the Fed’s prudent approach emphasized by Powell, economic indicators continue to point to a solid American economy, minimizing fears of a recession. However, this dynamic imposed some pressure on the dollar in relation to the main currencies.

The DXY index showed a slowdown in its recovery last week, stabilizing in the 104-point range. Currently, it seeks to consolidate the level of 104.3 as support.

If it remains above this mark, the index has the potential to reach 105 points. However, current data suggests a limitation in its progress in the coming months.

If it breaks the support of 104 points, a pullback to 103.70 is likely. Although this is crucial support, a sharper drop to the range between 101.5 and 102.2 is not ruled out.

Data on non-agricultural employment, expected at the end of the week, will be essential and could significantly influence the trajectory of the dollar index.

In the pair’s scenario, the expectation of interest rate cuts this year maintains optimism about the American economy and growth data, despite the Fed’s caution in waiting for more evidence of an inflationary slowdown.

This raises projections that the ECB may reduce its rates before the Fed, especially after considering the European economic context, which, marked by stagnation, suggests the need to bring forward interest cuts in the region.

Thus, expectations are growing for a rate adjustment by the Fed in June, while the ECB could do so as early as May, resulting in a price compression in the EUR/USD pair.

Since last week, EUR/USD has been seeking to stabilize at the 1.077 support. If it manages to sustain this level, it could trigger a bullish move up to 1,092.

A break in the trend line established since October 2023 could lead to an accelerated depreciation of the euro against the dollar.

A downward breakout of the symmetrical triangle seen in the weekly analysis would increase the chances of EUR/USD falling below 1.05.

Medium-term price developments will be crucial, especially around the 1.092 level.

Remaining above 1.07 in the coming days, EUR/USD volatility is expected to intensify in the summer months.

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Disclaimer: this article is for informational purposes only and does not constitute any offer or investment recommendation.