The euro advanced to its strongest level against the dollar in eight weeks on Monday, as investors reassessed the outlook for Federal Reserve policy amid mounting expectations of a near-term rate cut.
EUR/USD rose to 1.0885, its highest since March 27, extending a three-day winning streak that has pushed the pair up roughly 1.5% from mid-April lows. The dollar’s broad decline reflected growing bets that the Fed could ease monetary policy sooner than previously anticipated, following softer-than-expected U.S. jobs and inflation data in recent weeks.
Market pricing on Monday indicated a roughly 70% probability of a 25-basis-point Fed rate cut by September, according to CME Group’s FedWatch tool. That compares with just over 50% a month ago, as traders increasingly bet on a shift toward monetary easing.
The euro’s gains were further supported by signs of economic resilience in the eurozone. Preliminary data from the bloc showed inflation holding steady at 2.4% year-on-year in April, while Germany’s factory orders rebounded more than expected, easing concerns about a deeper slowdown in Europe’s largest economy. The European Central Bank is widely expected to begin cutting interest rates in June, which has also weighed on the single currency’s yield advantage over the dollar.
U.S. Treasury yields fell across the curve, with the 10-year note dipping below 4.5% for the first time since early March, reflecting the shift in rate expectations. The 2-year yield, more sensitive to Fed policy, dropped to 4.83%, down from around 5.05% a week earlier.
Investors are now looking ahead to a slate of U.S. economic indicators this week, including the ISM services PMI on Wednesday and nonfarm payrolls on Friday. These releases could either reinforce expectations for a September rate cut or prompt a reassessment if the data surprises to the upside.
Analysts at Goldman Sachs noted that while the Fed remains data-dependent, the balance of risks has tilted toward earlier easing. "The trend in U.S. inflation and labor market data has been consistent with a more dovish Fed," the bank said in a client note. "We see a September cut as increasingly likely, but the path will depend on incoming data."
The dollar’s broader index, the DXY, fell 0.2% to 105.12, nearing its lowest level since late March. The yen also weakened, with USD/JPY rising 0.3% to 156.75, as market participants awaited further signals from the Bank of Japan.
Traders will closely monitor speeches from Fed officials this week, including remarks from Chair Jerome Powell, for any hints on the timing of policy adjustments.
