US Dollar Forecast: EUR/USD Falls as Weak Eurozone Data Fuels ECB Rate Cut Bets

U.S. Dollar Index Rises on Euro Weakness and ECB Rate Cut Expectations

The U.S. Dollar Index (DXY) firmed on Monday, reaching 101.229 before retreating, supported by a sharp decline in the euro and heightened expectations of further monetary easing from the European Central Bank (ECB).

This move keeps the index well above last week’s one-year low of 100.215. A trade through 101.917 would shift the main trend to bullish, possibly triggering a rally toward the 50-day moving average of 102.383, while a drop below 100.215 would signal a resumption of the downtrend.

At 15:49 GMT, the U.S. Dollar Index (DXY) is trading 100.766, up 0.028 or +0.03%.

Euro Falls on Weak Economic Data

The euro declined 0.35% to $1.1122, marking its largest single-day drop in over three months. This decline was triggered by disappointing business activity data from the eurozone, which showed an unexpected contraction in September. A survey conducted by S&P Global revealed that the services sector stagnated while the downturn in manufacturing deepened, particularly in Germany and France.

The weak economic figures have raised market expectations for further ECB rate cuts, with traders now anticipating 42 basis points of reductions by year-end, up from 38 basis points last week. Kenneth Broux, head of corporate research at Societe Generale, noted that the ECB may soon shift its focus from inflation to growth, following the lead of the U.S. Federal Reserve.

Sterling Slips Despite Mixed UK Data

The British pound fell 0.3% to $1.3248 early in the session, but rebounded to its high of the session at 1.3359 after business activity data in the UK showed a slower-than-expected slowdown. Additonally, the pound remains close to its two-year high from Friday, supported by strong retail sales. The Bank of England (BoE) kept rates steady last week, with Governor Andrew Bailey signaling a cautious approach to future rate cuts to avoid overly rapid or deep reductions.

Yen Faces Pressure from BOJ Policy and Political Uncertainty

The U.S. dollar eased against the yen, though the greenback remains near a two-week high of 144.50 yen, reached last week after the Bank of Japan (BOJ) held rates steady. The BOJ’s dovish stance, coupled with political uncertainty surrounding Japan’s upcoming leadership vote, has tempered the yen’s recent strength. The ruling Liberal Democratic Party’s upcoming election to replace Prime Minister Fumio Kishida could further influence BOJ policy, with frontrunners expressing diverging views on monetary strategy.

Gold Gains Despite Strong Dollar

Gold prices edged higher to a new record high at $2634.91 before flat-lining, with spot gold (XAU/USD) gaining slightly despite the stronger dollar. Typically, a stronger dollar weighs on commodities like gold, but safe-haven demand appears to be supporting the metal amid global economic uncertainty.

Market Forecast

The U.S. Dollar Index is expected to remain firm in the near term, especially if eurozone economic weakness persists and traders continue to bet on ECB rate cuts.

A break above 101.917 could push the DXY higher toward the 102.383 level, while a move below 100.215 would renew the downtrend.

The euro may face continued pressure as weak data and monetary policy divergence with the U.S. weigh on sentiment.

Meanwhile, the yen and pound could see increased volatility driven by domestic political events and central bank signals. Traders should stay focused on ECB guidance and U.S. economic indicators for the next major market moves.