Euro under pressure after Powell's cautious remarks

The euro declined in European trading on Wednesday against a basket of global currencies, heading for its first loss in three sessions versus the US dollar, as the greenback rebounded following cautious comments from Federal Reserve Chair Jerome Powell.

After the European Central Bank’s most recent meeting, which included more hawkish remarks than markets had anticipated, the likelihood of a eurozone rate cut before the end of the year has diminished. To confirm those expectations, investors are awaiting further evidence on the course of monetary easing in the euro area.

Price Overview

• EUR/USD today: The euro fell about 0.2% to $1.1795, down from an opening of $1.1815, after reaching a high of $1.1819.

• On Tuesday, the euro gained 0.1% against the dollar, its second consecutive daily advance, supported by weaker industrial and business activity in the United States during September.

US Dollar

The dollar index rose about 0.2% on Wednesday, on track for its first gain in three sessions, reflecting a rebound in US currency levels against both major and minor peers.

This recovery comes amid mounting doubts about the two additional rate cuts expected before year-end, particularly after Powell adopted a cautious tone on further monetary easing.

Powell stated that the Fed must continue balancing the competing risks of elevated inflation and a weakening labor market when setting policy, reiterating last week’s remarks. He described the policy dilemma as being in a “difficult” position.

James Neifton, senior corporate FX dealer at Convera, commented: “Powell’s remarks reinforced the Fed’s cautious approach.” He added: “Powell acknowledged the absence of risk-free policy options, warning that premature easing could entrench inflation, while excessive tightening could needlessly harm employment prospects.”

European Interest Rates

• Sources indicate that ECB policymakers see no need for further rate cuts to reach the 2% inflation target, despite updated forecasts pointing to lower rates over the next two years.

• Sources also noted that unless the eurozone suffers another major economic shock, borrowing costs are expected to remain at current levels for some time.

• Money market pricing for a 25-basis-point ECB cut in October is currently steady at around 10%.

• Traders have scaled back bets on ECB easing, pointing instead to the end of this year’s rate-cut cycle.

• To reassess these probabilities, investors will closely monitor incoming European economic data and remarks from ECB officials in the coming period.