Euro-Dollar Falls Below 1.09

Above: File image of Governor Waller. Image: Federal Reserve.

The Euro to Dollar exchange rate (EUR/USD) breached the 1.09 level after U.S. Federal Reserve speakers confirmed it was appropriate to retain a cautious and deliberate approach to cutting interest rates.

EUR/USD reached 1.0889 after FOMC member Christopher Waller said more caution on interest rate cuts was needed going forward.

He said that the US economy is in a sweet spot, and the Fed's job is to keep the economy there, as the labour market remains healthy, and inflation is coming back to the 2% target.

Waller said the Fed now needs to continue cutting rates at a deliberate pace, having started the cycle with a sizeable 50 basis point cut.

Market pricing shows the Federal Reserve is now expected to cut interest rates by less than the European Central Bank (ECB) over the remainder of 2024, flipping a previous expectation that the Fed would lead the charge.

"EUR/USD breached the 1.09 mark for the first time since August, as demand for the greenback remains strong," says Kristoffer Kjær Lomholt, an analyst at Danke Bank. "We seek strategic selling opportunities."

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FOMC member Neal Kashkari said that it would be appropriate to consider modest rate cuts going forward, and the Fed is on the edge of the 2% inflation target.

"The greenback continued its recent strong run," says Michael Brown, Senior Research Strategist at Pepperstone.

Brown explains, "there is little option other than the greenback – the Chinese recovery remains anaemic, with stimulus falling short of expectations; the eurozone remains deep in the doldrums; the UK economy is bracing for a brutal round of tax hikes in the 30th October Budget; plus, the outlook is far from rosy elsewhere in places such as Japan, Australia, and New Zealand."

Above: EUR/USD at daily intervals.

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The ECB is anticipated to cut interest rates on a second consecutive occasion on Thursday in response to falling inflation and stagnating economic growth in Germany and France.

The Dollar will also retain a bid into the U.S. election, with bookmakers having Donald Trump as the slight favourite to win the vote.

Trump is expected to boost government debt and enact swinging import tariffs, which economists say will be inflationary.

"Trump’s plan to have an across-the-board 10% to 20% tariff on goods imports would raise revenue but would come at a cost to GDP and household disposable income. It would also have a reasonable impact on inflation," says Tom Kenny, an analyst at ANZ Bank.

This can keep the Fed 'tighter' for longer, which supports USD.

"This trend could continue in the coming month due to uncertainty surrounding the US election, geopolitical tensions, and doubts about the pace of the Fed's easing cycle," says Lomholt.