European session review: USD continues to see support following yesterday’s Fed policy update

USD appreciated against other major currencies in the European session on Thursday as investors continued to digest the outcomes of the Federal Reserve’s June policy meeting later in the day.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, rose 0.23% from the previous close to 104.89.

In line with markets’ expectations, the U.S. central bank’s policymakers unanimously voted to leave the target range for the fed funds rate unchanged at 5.25-5.50% - the highest in 22 years - for the seventh straight meeting yesterday. In the policy statements, the officials highlighted that they do not think it will be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2%. However, the real surprise for investors was not the hawkishness of the Fed’s language but the updated projections of its members, which showed they now expect only one interest rate cut this year versus three at the time of the March projections. Markets had anticipated the Fed’s June projections would signal two rate decreases in 2024.

Despite a more conservative 2024 rate outlook from the Fed, many market participants are still convinced that the interest rates in the U.S. will be decreased at least twice by the end of this year. According to the CME FedWatch Tool, markets are now pricing in a 63.3% probability of a 25 basis points rate cut by the Fed in September and a 78.5% chance of the move in November.

Later in the day, investors will receive the U.S. weekly jobless claims statistics and the May producer price report. The latter is expected to show a slowdown in producer price growth on a monthly basis. If the PPI report comes in cooler than anticipated, this will add to markets’ confidence that the Fed might be able to reduce interest rates in September.