The US dollar is enjoying buoyant demand, denting the investment luster of risk assets, including the euro and British pound. Investors are now speculating that the Federal Reserve may not be as dovish as they had hoped. This idea is once again driving demand for the dollar, as can be clearly seen on the technical chart.
During yesterday's speeches from several Fed policymakers, only Mary Daly, President of the Federal Reserve Bank of San Francisco, was the most dovish, stating that she expects further rate cuts from the US central bank to prevent further weakening of the labor market.
"So far, I haven't seen any information that suggests we can't proceed with further rate cuts," Mary Daly said on Monday at the TechLive Wall Street Journal conference in Laguna Beach, California. "High interest rates are too harmful for an economy that is already on a path to 2% inflation, so I don't want the labor market to suffer too much."
To recap, at the policy meeting last month, Fed officials began cutting interest rates for the first time since the start of the pandemic. They lowered the official funds rate by half a percentage point, to a range of 4.75% to 5%, expressing concern about sluggish employment. Economic data since then has shown that hiring in recent months has been higher than initially reported, and now market participants expect smaller rate cuts at the upcoming meetings this year—just a quarter-point cut. The next meeting is scheduled for November 6-7.
The President of the San Francisco Fed also stated that the decision in favor of an outsized rate cut of half a percentage point instead of a quarter was the right one. Unfortunately, the official did not provide any hints about how she would vote in the future. "We will continue adjusting policy to make sure it fits with our economy," Daly added.
Other Fed representatives who spoke earlier made it clear that they favor a slower pace of rate cuts than what was implied after the half-point reduction in September, which has been a key catalyst for the US dollar's strengthening.
Dallas Fed President Lorie Logan stated that the rate-setting committee should act cautiously given the high level of economic uncertainty, arguing that a gradual approach to lowering rates to a neutral level could help manage risks and quickly achieve goals.
Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said he expects more modest rate cuts in the coming quarters, which would allow a gradual return to a neutral level.
Kansas City Fed President Jeff Schmidt also believes that drastic steps should be avoided now, especially given the uncertainty regarding the future direction of policy.
Technical outlook for EUR/USD
Currently, EUR/USD buyers need to focus on reclaiming the 1.0840 level. Only this will allow them to implement a test of 1.0870. From there, the instrument could climb to 1.0900, but it will be challenging without the support of large market players. The furthest target would be the 1.0930 high. In case of a decline, I expect robust buying activity around 1.0815. If no major buyers emerge there, it would be wise to wait for a retest of the 1.0780 low or consider long positions from 1.0760.
Technical outlook for GBP/USD
For GBP/USD buyers, reclaiming the nearest resistance at 1.3010 is crucial. This will allow them to aim for 1.3050, but breaking above this level will be difficult. The furthest target would be the 1.3095 area, after which we could see a more significant upward push toward 1.3131. In case of a decline, the bears will try to take control around 1.2965. If they succeed, breaking this range would deal a serious blow to the bulls and push GBP/USD toward the 1.2940 low, with a further target of 1.2910.
