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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose.

When the Fed will change interest rates and what it means for the dollar

Stronger-than-expected US data has shifted expectations around interest rate cuts from the Fed. Find out what current projections are and how US dollar is affected.

Source: Bloomberg

Data current as of 2/5/2024

Key points

  • EUR/USD heads towards 1.0700: (0:35)
  • Less than 15% chance of March rate cut*: (1:43)
  • Over 100bps of cuts still expected for 2024*: (2:44)
  • First 25bps cut could be in May: (4:04)
  • 70% of EUR/USD traders are long: (6:31)

*Probabilities calculated using CME FedWatch tool

US dollar made strong moves to start the week, with EUR/USD shooting lower towards 1.0700 to mark new year-to-date lows.

Will interest rates move lower?

Interest rate decisions by central banks are one of the primary drivers of currency value. As of now, there's less than a 15% chance of a rate cut by the Federal Reserve in March according to CME's FedWatch tool. This suggests that traders are anticipating a stable interest rate environment in the short term, which can have a stabilizing effect on the US dollar.

However, looking forward into 2024, the same markets are pricing in over 100 basis points of cuts. This longer-term outlook suggests that traders expect a more dovish approach from the Fed in the future, which typically aims to stimulate economic growth but can result in a weaker currency. The anticipation of these cuts can lead to early adjustments in trading strategies, as investors seek to capitalize on the expected changes in currency valuation.

The first of these cuts could potentially come as soon as May, with a 25 basis point reduction being the likely initial move. This pending adjustment has the potential to create ripples in the EUR/USD market, influencing the pair's trajectory as traders adjust their positions in anticipation of a changing interest rate landscape.

Interestingly, a significant majority of EUR/USD traders at IG - 70% - are currently long on the pair. This overwhelming bullish sentiment underscores the market's belief in the Euro's strength or the Dollar's relative weakness, or perhaps both.

For traders, these insights into the EUR/USD dynamics and interest rate expectations offer a roadmap for potential strategies. Whether it’s taking advantage of the current trend towards 1.0700, positioning for the anticipated rate cuts in 2024, or considering the implications of the crowded long positions, there are opportunities for astute traders to capitalize on.

How to trade EUR/USD

  1. Open an account to get started, or practice on a demo account
  2. Choose your forex trading platform
  3. Open, monitor, and close positions on EUR/USD

Trading forex requires an account with a forex broker like IG. EUR/USD can be found in the "Major" pairs tab. Many traders watch other major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.

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