The market thinks that The Fed will soon stop rate hikes, thus boosting EUR/USD and GBP/USD, which still have the potential for further interest rate increases.

US dollar took a beating in Tuesday's (April 4) trading. The US dollar index (DXY) tumbled around 0.5%, hitting its lowest since early February at around 101.50. Meanwhile, several other major currencies rallied to new highs.

EUR/USD rose over 0.5% to around 1.0970. GBP/USD soared nearly 0.8% and hit a 10-month high of 1.2525. The euro and sterling strengthened due to a decline in the Federal Reserve's interest rate expectations.

gbpusdGBP/USD Daily chart via TradingView

The current Fedwatch CME data shows a probability of around 45% for the Fed's interest rate to remain at the current level (range of 4.75%-5.00%) until July and only a 35% chance of another 25 bps interest rate hike. The data also indicates a 15% chance of a 25 bps interest rate cut in the same period. In other words, most market participants now predict that the Fed will end its rate hike cycle soon.

The decline in the Fed's interest rate expectations has weighed on the value of the US dollar. On the other hand, market players still believe that the European Central Bank (ECB) will raise interest rates several times more. Consequently, the euro has outperformed the US dollar.

"We've been saying that FX hasn't really captured what's been happening in rates, and there is scope still for the dollar to weaken a bit further," said Derek Halpenny, head of research for global markets at MUFG. "Short-term spreads between core Europe and the U.S. are more consistent with euro-dollar trading near $1.10 to $1.15."

The pound sterling also emerged as a winner thanks to the expectation of a rate hike and the relatively better economic conditions in the UK for the time being. The momentum of the GBP/USD rally even broke through a key technical level, as viewed by experts.

"$1.2448 has been a huge technical chart resistance. It has been a high twice this year," said Joe Tuckey, head of FX analysis at Argentex. "Breaking through this means it is an initiation point for fresh sterling buyers, a short covering area for sterling shorts."

The release of the JOLTs (Job Openings and Labor Turnover Survey) job recruitment report tonight weighed the US dollar. The number fell from 10.56 million to 9.93 million in February 2023, whereas the previous consensus had predicted a more moderate decline to only 10.40 million. Data like this is a bad sign ahead of Friday's release of the US Nonfarm Payroll data.