Anna 
The dollar is poised for its most significant weekly decline in five months as the possibility of rate cuts from the Federal Reserve, combined with a firm stance from European central banks on monetary policy, propels weekly gains for the euro and the pound.
In a week marked by central bank actions, traders gained more clarity on the likely timing of interest rate cuts after Federal Reserve Chair Jerome Powell indicated that the tightening of monetary policy is likely over, with discussions of cuts now “coming into view.” This divergence between the U.S. and other central banks has pushed the dollar index on track for a nearly 2% slide this week, marking its most substantial weekly loss since mid-July and nearing its lowest point in four months.
Futures markets indicate a 75% probability of a rate cut by the Fed in March, according to the CME FedWatch tool, a significant increase from the 40% chance at the start of December. Market expectations suggest a 150-basis-point reduction in U.S. rates by the end of next year, double the Fed’s projections of a 75-basis-point cut in 2024.
Despite the euphoria in markets driven by the prospect of a benign rate environment, concerns linger as the U.S. economy slows and inflation remains above target. Analysts warn that a swift easing by the Fed might lead to a return in inflation, impacting investors’ confidence.
On Thursday, the European Central Bank and the Bank of England diverged from the Fed, resisting immediate rate cuts and emphasizing their focus on combating inflation. This stance bolstered the euro and pound. Although investors are still heavily betting on rate cuts from both central banks in 2024, the ECB, with more room to ease, may be cautious about the timing to keep the currency strong and limit imported inflation.
Preliminary business activity readings in France and Germany revealed an unexpected slowdown in the eurozone’s two largest economies, briefly pushing the euro lower. However, the euro remains up 2% for the week. Sterling, after surging to a four-month high on the Bank of England’s hawkish stance, eased slightly, while the Japanese yen strengthened, heading for its fifth straight week of gains against the dollar.
