EUR/USD exposed to parity on Fed policy divergence
EUR/USD found temporary support in the American session on Friday (3/1) after diving near 1.0220 on Thursday, the lowest level seen in more than two years. Market experts see the major currency pair falling further to parity on the Federal Reserve (Fed) – European Central Bank (ECB) divergent views on the monetary policy outlook.
On the left side of the Atlantic, Fed officials have guided for fewer interest rate cuts in 2025, while on the right, ECB policymakers see a continuation of the policy easing cycle at the current pace.
According to the latest dot plot in the Fed’s Summary of Economic Projections, Fed officials see the federal funds rate heading to 3.9% by year-end. This suggests that policymakers expect two rate cuts this year, compared to four predicted in September.
Market participants have also trimmed dovish bets on the Fed. They hope that under President-elect Donald Trump, such as tighter immigration, higher import tariffs, and lower taxes, will boost growth and inflationary pressures in the US economy.
The US Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, edged lower on Friday but remained near a two-year high above 109.00.
Looking ahead, investors will be watching a series of economic indicators related to the US labor market, which will influence Fed interest rate expectations. Currently, the Fed is almost certain to keep interest rates unchanged in the range of 4.25%-4.50% at its January policy meeting.
On Friday, the US Dollar will be guided by the US ISM Manufacturing Purchasing Managers' Index (PMI) data for December, which will be published at 15:00 GMT. The PMI is expected to remain at 48.4, indicating that manufacturing activity contracted at a steady pace.
Source: FXStreet
