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EUR/USD surges as dollar falls on Fed rate hike doubts

The US dollar was once again pressured on Tuesday afternoon as ongoing doubts about further interest rate hikes by the Federal Reserve were intensified by dovish comments from a key Fed official. Fed Governor Lael Brainard said in a speech that the central bank’s intentions to reduce its balance sheet would begin “soon.” However, Brainard went on to say that "the neutral level of the federal funds rate is likely to remain close to zero in real terms over the medium term. If that is the case, we would not have much more additional work to do on moving to a neutral stance." In other words, she indicated that the Fed may not be hiking interest rates for much longer.

These dovish comments come at a time when concerns about low inflation in the U.S. have already begun to erode expectations of an aggressive pace of monetary policy tightening by the Fed. Markets are now expected only slightly more than a 50% likelihood of a third rate hike this year. These expectations are significantly down from previous months.

Meanwhile, as the US dollar continues to be weighed down by lowered expectations of further rate hikes, the euro shared currency has been strengthening on speculation regarding a potentially hawkish turn by the European Central Bank. This could include impending ECB tapering in the wake of Mario Draghi’s recent comments on rising inflation. This potentially hawkish turn by the ECB has been viewed in stark contrast against increasing Fed doubts, which have helped propel EUR/USD to new highs.

From a technical perspective, EUR/USD rose to re-test the 1.1450 resistance area on Tuesday as the dollar fell, reaching a new 14-month high in the process. This resistance area was just hit in late June before a sharp pullback. EUR/USD is currently in a strong uptrend, and any upside breakouts may be considered confirmed continuations of that uptrend. With further Fed-driven dollar-weakening combined with continued euro support, a breakout above the 1.1450 area should next target key resistance around 1.1600.

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