US Dollar Weakens Amid Hawkish Fed While EUR/USD Holds Strong as ECB Cut Looms – ForexNews.PRO

A hawkish statement from Powell did not boost the US dollar yesterday, as the currency market continues to heavily weigh the performance of risk assets against one another.

The EUR/USD exchange rate is well-positioned to take advantage of the dollar’s unique weaknesses. We believe that today’s anticipated 25 basis point rate cut by the ECB will not hinder another upward movement towards 1.15 in EUR/USD.

USD: Powell Shuns Rescuer Role

Fed Chair Jerome Powell communicated a notably hawkish stance yesterday, his clearest since “liberation day.” Market sentiments had leaned towards the narrative that the Fed would intervene with rate cuts, influenced by Trump’s support, despite ongoing inflation uncertainties.

Powell indicated that he anticipates higher inflation alongside a weaker job market due to tariffs, but emphasized that the Fed’s primary concern is inflation. With Trump’s unexpected tolerance for market volatility and Powell’s refusal to offer support, equity markets remain at risk.

In typical market scenarios, Powell’s hawkish tone would have led to a positive reaction for the USD. However, the dollar continues to be impacted by concerns over the underperformance of US assets relative to others and overall growth issues, which may be exacerbated by the Fed’s hawkish stance.

Notably, front-end USD swap rates did not increase in response to Powell’s remarks, and there is still more than a 60% probability priced into the OIS curve for a rate cut in June. This reflects persistently pessimistic growth expectations in the US, which are expected to lead to Fed easing.

Despite numerous signs that the dollar is oversold and undervalued, we do not foresee a catalyst for a recovery today. If US equities lag once more, the DXY could drop below 99.0. Investors will be closely monitoring whether jobless claims have risen following “liberation day,” with soft housing data also due out today.

EUR: Expected Cut, Lack of ECB Guidance

We anticipate a 25 basis point rate cut from the ECB today, a view that is widely shared, with markets fully pricing in this move, potentially limiting its effect on the euro. As noted in our ECB Cheat Sheet, we do not expect the ECB to provide much guidance, which may mirror the Bank of Canada’s recent communication—admitting policymakers are just as perplexed as the market regarding tariff impacts, and lacking the ability to provide a forward-looking stance at this point.

Currently, the FX market seems indifferent to short-term interest rate differentials. If it were not, EUR/USD would likely be trading significantly below 1.10. While we cannot rule out the chance that markets might seize the ECB’s cut as an opportunity to take profits on crowded EUR long positions, the ongoing negative sentiment from the US is still pressuring the dollar. This places the highly liquid euro in an excellent position to benefit from market shifts.

We maintain a tactical target of 1.15 for EUR/USD, with risks for even greater gains. By the end of the quarter, we anticipate that selling pressure on the USD will ease, leading us to target 1.14, followed by a potential recovery for the dollar in the third quarter.