Euro drops below 1.1400 as hawkish Fed bets push the US Dollar to one-year highs
- EUR/USD slips below 1.1400 as the US Dollar climbs to one-year highs.
- Markets price in a 70% chance of a September Fed rate hike following last week's hawkish meeting.
- Upbeat US PMI data reinforces the higher-for-longer narrative ahead of PCE inflation data.
The Euro (EUR) extends losses against the US Dollar (USD) on Tuesday, with EUR/USD slipping below the 1.1400 mark, a support level that had held since June 2025.
At the time of writing, the pair is trading around 1.1380, down 0.40% on the day.
A sustained break below the 1.1400 mark could open the door to further losses. However, with the daily Relative Strength Index (RSI) deep in oversold territory at 28, a short-term rebound cannot be ruled out. Still, the broader bias remains bearish, with EUR/USD trading well below its 50-, 100-, and 200-day Simple Moving Averages (SMAs), clustered near the 1.1650 area.
The latest leg lower comes as the US Dollar climbs to one-year highs following the Federal Reserve's (Fed) hawkish stance at last week's monetary policy meeting. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is hovering around 101.35, its highest level since May 2025.
Policymakers are increasingly leaning toward tighter monetary policy as they seek to bring inflation back to the 2% target after inflation accelerated in recent months due to higher energy costs. Traders currently see a 70% chance that the US central bank could raise interest rates as soon as September, according to the CME FedWatch Tool.
Adding to the US Dollar's strength, preliminary Purchasing Managers Index (PMI) data released on Tuesday came in above expectations. The S&P Global Services PMI rose to 51.3 from 50.7, while the Manufacturing PMI climbed to 55.7 from 55.1.
Attention now turns to Thursday's US Personal Consumption Expenditures (PCE) inflation data and the final estimate of first-quarter Gross Domestic Product (GDP), which could offer fresh clues on the Fed's policy path. Meanwhile, the Eurozone economic calendar is relatively light, leaving traders focused on speeches from European Central Bank (ECB) officials.
ECB Governing Council member Boris Vujčić said on Tuesday that "Eurozone growth has proven more resilient in the face of supply shocks than people expected." ECB Chief Economist Philip Lane said the central bank "has to remain attentive to risks on both sides of the outlook" and warned that higher energy prices are expected to keep inflation "well above target into the first half of 2027."
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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