Traders expect the Fed's rate cuts to outpace the ECB's, boosting the euro to a year

On Wednesday,Hong Kong foreign exchange the euro briefly rose by 0.4% to 1.1169 against the dollar, marking its highest level since July 2023. At the same time, the pound also touched its highest level since last July. This wave of gains was primarily driven by the latest minutes from the Federal Reserve meeting, which showed that several officials deemed it necessary to cut interest rates, leading to a broad weakening of the dollar.

The market reaction is driven by forex traders' expectations that Federal Reserve Chairman Jerome Powell will express support for accelerating rate cuts in the coming months at the upcoming Jackson Hole Economic Symposium, outpacing the European Central Bank's rate-cutting speed. Meanwhile, the slowdown in European economic growth increases the likelihood of further rate cuts by the ECB. Traders are closely monitoring various data to gauge the future direction of monetary policy.

Since the beginning of this month, with the market's increasing expectations of Federal Reserve rate cuts, the dollar has continued to weaken, pushing the euro-dollar exchange rate up by 3%.

Yusuke Miyairi, a forex strategist at Nomura International, stated: "The weakness of the dollar is boosting the euro, but the fundamentals of the eurozone, particularly the economic growth situation, do not necessarily support a sustained rise in the euro."

Nomura expects that the eurozone's July manufacturing survey results, to be released on Thursday, may be weaker than expected. Miyairi pointed out that this will be a "significant test" for the euro.

Following the release of the Federal Reserve meeting minutes, the Bloomberg Dollar Spot Index fell to its lowest intraday point. Since preliminary revisions by the U.S. Bureau of Labor Statistics showed the largest drop in U.S. employment numbers since 2009, the dollar index has been weak throughout Wednesday's morning session.

Kit Juckes, Chief FX Strategist at Société Générale, stated, "After the weak labor market data in July, the market remains highly vigilant about signs of weakness in the U.S. economy."

He also noted that before the U.S. releases its next monthly employment report in early September, the euro-dollar exchange rate may fluctuate between 1.10 and 1.12.

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