Expectations of a rate cut dragged the dollar lower, with the euro hitting a five month high

The euro rose to its highest point against the dollar due to expectations of a Fed rate cut and a seasonally weaker dollar.

On Wednesday, the euro climbed 03% to 11113, one of the largest gainers in the G10. So far this year, the euro has been **295%, with most of the gains coming from the past few weeks.

At its December policy meeting, the Fed sent its clearest signal yet that the most aggressive rate hike cycle in decades is over. Fed Chair Jerome Powell said that interest rate cuts are on the table, and the dot plot also shows that the Fed will make a series of rate cuts in 2024, pushing the dollar lower.

On the other hand, inflation in the United States is also continuing to slow down, and according to data released by a number of local Feds in the United States, the U.S. job market will further cool down in 2024, wage growth is expected to slow down, and reduce inflationary pressures. At the same time, the dollar usually sees a seasonal weakening at the end of the year, partly due to corporate activity.

According to CME Group's FedWatch Tool, the market expects the Fed to stay on hold at its upcoming January meeting and has fully priced in rate cuts in March and May next year.

In the Eurozone, ECB President Christine Lagarde made quite hawkish remarks at a recent press conference, saying that inflationary pressures in the eurozone have eased in line with expectations, but wage growth remains strong and the outlook is particularly uncertain, pushing back market expectations for interest rate cuts.

Lagarde also stressed that the ECB should not lower its alert line, and that central bank policy decisions depend on economic data and are not affected by market pricing or time constraints.

The ECB's "higher and longer" tightening policy is expected to support the strength of the euro. Amid thin holiday trading, market risk sentiment and continued central bank policy adjustments are expected to continue to impact EURUSD volatility.

However, Helen Given, a forex spot trader at Monex USA, believes that the euro's rally may be limited.

"After entering the first quarter, the rally of the holiday season will weaken somewhat. The euro seems to be overbought, and with the German economy in jeopardy, the danger of a regional recession seems much higher than in the United States. ”