Both the pound and euro posted further gains against the under-pressure US dollar yesterday, as markets ramp up bets that the Fed will be able to cut rates possibly even before the middle of 2024. EURUSD broke stubborn resistance to trade briefly above 1.10 with cable following in its wake to trade as high as 1.2733 before both pairs consolidated lower. Treasury yields fell and the dollar index dropped for a fifth day after Fed Governor Christopher Waller said that policy is well positioned to return inflation to the central bank’s 2% goal, suggesting that rate setters may not need to hike interest rates any further and that there was a possibility for the Fed to adjust its funds rate lower in the coming months if inflation continues to ease. Discussions around rate cuts have been a taboo subject for Fed officials of late, so markets reacted favorably to his comments suggesting that if inflation trend continues for the next 3-5 months, then the Fed can start cutting rates. Waller is historically one of the Feds most hawkish officials, and his comments come ahead of the release of the Fed’s Beige book later today and a key speech from Chairman Jerome Powell.
There is the potential for additional volatility in the single currency, with month end related flows continuing ahead of key inflation data releases from the euro area in the coming days. The previous resistance level of 1.0960 becomes fresh support in EURUSD, with intraday resistance coming in at 1.1017 ahead of 1.1065 which was the August 10 high.
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