The US dollar's strength suppresses the euro; December rate cut expectations sharply revised down to 46%

Federal Reserve officials have recently signaled a more cautious stance, directly impacting market expectations for rate cuts. The EUR/USD currency pair continued its decline during Monday’s Asian session, falling to around 1.1610 and hitting a new low. The US dollar gained significant support during this rally, while the euro remained under pressure.

Market Rate Cut Expectations Significantly Revised

According to the latest data from the CME FedWatch Tool, investors’ probability of the Federal Reserve cutting interest rates by 25 basis points in December has fallen back to 46%, down from 67% a week ago. This shift reflects a reorientation of market views on the Fed’s policy stance—from expecting rate cuts to adopting a more wait-and-see attitude.

Fed Officials Turn Cautious

The latest remarks from the President of the Federal Reserve Bank of Kansas City served as a key trigger for the change in market sentiment. The official stated on Friday that monetary policy needs to “resist demand growth” and described the current policy as “moderately restrictive,” believing this stance is appropriate. While such comments are somewhat mild in tone, they signal that the Fed does not see an urgent need to cut rates, thereby supporting the strength of the US dollar.

Economic Fundamentals and Policy Outlook

The resolution of the US government shutdown provided additional support for the dollar. Last week, the Trump administration signed a funding bill, allowing the federal government to reopen smoothly after 42 days of shutdown. This improvement in market sentiment further enhanced the attractiveness of the US dollar.

Regarding the European Central Bank, recent statements from Governing Council members indicate that, although there are risks of inflation slowing, the eurozone economy remains on a steady growth path. Despite uncertainties caused by Trump’s tariff policies, the ECB emphasized that the financial system has sufficient buffers and will continue to maintain a cautious policy stance. This suggests that the ECB is unlikely to rush into adjusting monetary policy in the short term.

Market Implications

Currently, both the US and European central banks are in a wait-and-see mode, and the rate cut cycle may be temporarily paused. The fluctuations in the exchange rate market reflect this policy shift, and investors should closely monitor further statements from central bank officials.