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EURUSD: Weekly Analysis update & Forecast

The U.S. dollar, as measured by the DXY index, suffered heavy losses last week, pressured by the collapse in U.S. Treasury yields across most tenors following the Federal Reserve’s pivot. Although the U.S. central bank held its policy settings unchanged on Wednesday, it embraced a dovish posture – a turnaround that appeared unlikely based on recent rhetoric.

To offer some context, the Fed adopted a more optimistic view of the inflation outlook, acknowledged the start of discussions about rate cuts and signaled 75 basis points of easing in 2024 at the end of its last meeting of the year. New York Fed President John Williams contested the idea of policymakers openly talking about slashing borrowing costs in an interview before the weekend, but Wall Street downplayed this contradiction. Many theories have emerged to explain the change in tune, but most traders believe it is not a complete policy reversal, but a damage control tactic to tamp down animal spirits and prevent financial conditions from easing further.

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