Euro softens below 1.1600 as markets price in Fed rate hike
- EUR/USD weakens to around 1.1585 in Monday’s early Asian session.
- Traders ramp up bets that the Fed will increase its benchmark interest rate by a quarter percentage point on Wednesday.
- ECB's hawkish stance prompts expectations of further rate hikes.
The EUR/USD pair declines to near 1.1585 during the early Asian session on Monday. The pair extends the decline amid aggressive Federal Reserve (Fed) rate-hike bets following hotter US inflation reports. Traders brace for the Fed interest rate decision later on Wednesday.
The US Consumer Price Index (CPI) accelerated in August, reinforcing expectations that the US central bank will raise interest rates next week. Data released by the Bureau of Labor Statistics on Friday showed that the US CPI rose 0.4% MoM in August, putting the 12-month increase at 3.4%. Both readings came in line with market expectations.
Meanwhile, the core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, versus 0.2% prior, beating the forecast of 0.2%.
Financial markets have priced in nearly a 91% probability of a quarter-point rate hike at the Fed's September meeting, up from 72% before the US PPI data, according to the CME FedWatch tool.
“There’s no guarantee that the Fed will hike next week, but it’s hard to see how the central bank can justify leaving rates on hold,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
The European Central Bank (ECB) raised the interest rate on the deposit facility to 2.50% at its September policy meeting last week, as widely expected. It was the ECB’s second hike this year, after policymakers raised borrowing costs in June for the first time since 2023.
Barclays analysts expect the ECB to hike further after a hawkish policy decision reinforced concerns that inflation could remain elevated for longer.
Euro under pressure as ECB hawkish tone keeps tightening expectations elevated
Analysts at Scotiabank note that the latest European Central Bank decision delivered “messaging from the ECB [that] was mixed but hawkish overall,” with policymakers publishing “a fresh forecast that saw inflation remaining above target through the end of the projection horizon.” According to the bank, the communication from ECB President Christine Lagarde, alongside “subsequent comments from key members of the governing council,” has “leaned toward further near-term hikes and pushed markets to price nearly 40bpts of additional tightening by year end,” reinforcing the market’s perception that the ECB remains firmly focused on inflation risks despite softer Euro price action.
Technical Analysis: EUR/USD is well-supported above the 100-day SMA
In the daily chart, EUR/USD sits above the Bollinger Bands’ lower band and the 100-day simple moving average (SMA), hinting at a modest underlying bid, but price remains below the Bollinger middle band, which keeps the topside capped. The Relative Strength Index (14) at 48.8 is close to neutral, suggesting that momentum is balanced and leaving the near-term bias broadly sideways while the pair consolidates between nearby support and overhead resistance.
On the topside, initial resistance is located at the Bollinger middle band SMA near 1.1628, followed by the upper band around 1.1695, where selling interest could intensify if tested. On the downside, immediate support aligns with the lower Bollinger band at 1.1560 and the 100-day SMA at 1.1555, forming a tight demand zone; a daily close below this cluster would expose the pair to deeper losses, while holding above it keeps the door open for another attempt toward the 1.1628 barrier.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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