US Dollar Forecast: EUR/USD Falls as ECB Prepares Rate Cut

Dollar Index Steady as Traders Focus on Fed, ECB, and Treasury Yields

The U.S. Dollar Index (DXY) traded steady to lower on Tuesday, reflecting a cautious market as traders assessed U.S. Treasury movements, recent economic data, and expectations surrounding the Federal Reserve’s anticipated rate cut in November. Meanwhile, attention is also on the European Central Bank (ECB), which is set to announce a widely expected 25 basis point rate cut this week.

At 14:30 GMT, the U.S. Dollar Index (DXY) is trading 103.128, down 0.085 or -0.08%.

Dollar Index Holds Key Levels

Technically, the DXY is balancing around key support and resistance levels. It hovers at 103.144, the 50% retracement level of the major range (106.130 to 100.157), with potential support at 102.478 and 101.852. Importantly, the index remains above its 50-day moving average (101.696), while staying within range of the long-term 200-day moving average at 103.761.

Recent hawkish comments from Fed Governor Christopher Waller, who urged caution in cutting rates too aggressively, have contributed to the dollar’s strength. Traders have assigned a nearly 90% probability to a 25 basis point rate cut in November, though expectations for further large cuts have receded.

Euro and Pound Under Pressure

The euro continues to weaken, hitting its lowest point since early August at $1.0885 ahead of the ECB meeting. The ECB is expected to deliver a 25 bps rate cut as inflationary pressures ease. This divergence in monetary policy between the Fed and ECB has weighed heavily on the euro, pushing it down against the dollar.

Similarly, the British pound has retreated, trading at $1.3079. Data from the U.K. labor market shows wage growth slowing to its lowest in two years, reducing pressure on the Bank of England (BoE) to maintain higher rates. The market now anticipates a BoE rate cut in the coming months, contributing to the pound’s recent 2% decline against the dollar.

Yen Weakness Persists

The Japanese yen has remained under pressure, trading near 149.29 against the dollar, just off a multi-month low of 149.98. Japan’s dovish stance, reinforced by Bank of Japan (BoJ) Governor Kazuo Ueda and new Prime Minister Shigeru Ishiba, has caused doubts about any immediate rate hikes, leading to the yen’s depreciation. The BoJ is expected to hold off further tightening this year, adding to the yen’s fragility.

Treasury Yields Lower After US Holiday

Following the Columbus Day holiday, U.S. Treasury yields were lower, with the 10-year yield at 4.073% and the 2-year at 3.95%. Investors remain focused on incoming economic data, including retail sales figures and industrial production, as they assess the Fed’s monetary policy path. Fed officials continue to express caution, with some indicating that future rate cuts will be gradual and data-dependent.

Gold Holds Steady, Limited by Dollar Strength

Gold prices were flat on Tuesday, constrained by the strong U.S. dollar and higher Treasury yields. Gold has faced headwinds after its recent rally to a record high of $2,685.42 last month, with profit-taking becoming a factor. However, the outlook for further rate cuts by the Fed is expected to provide continued support to gold prices into the end of the year.

Market Forecast

Given current conditions, the dollar may continue to trade in a range around 103.00 as the market anticipates both the Fed’s and ECB’s policy decisions. A bullish outlook could prevail if the Fed signals a more cautious approach to cuts, while any further dovish shifts from the ECB will likely put downward pressure on the euro, supporting the dollar. Meanwhile, gold is poised to benefit from a dovish Fed, with potential for a year-end rally.