According to analysts from Danske Bank, the EUR/USD pair dropped on “a hawkish” Federal Reserve. The central bank cut rates as expected but they point out there was a lack of commitment to more cuts.
“USD rates moved higher on the FOMC meeting on lack of commitment to more rate cuts this year. Before the meeting, the market was pricing about a 50% probability of another 25bp cut in October and December respectively. In addition, USD rates were pushed higher by lack of actions from Fed to resolve pressure on short-term USD funding rates. Consequently, EUR/USD dropped some 40-50pips down to around 1.1020 as higher USD rates supported USD on broad basis.”
“We stick to our 3M forecast of 1.10 for EUR/USD. We still look for more rate cuts from Fed, which should eventually support a higher EUR/USD. However, the easing package, and in particular strong forward guidance, from ECB last week does add some counterweight to more Fed easing. In the near-term, there is room for the pair to trade lower if Fed actively attempts to steer the market away from expecting more rate cuts, but also for the pair to move higher if data weakens and the market starts to price more Fed cuts again.”
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