Euro consolidates near three-month lows amid high Oil prices, Fed hiking bets

• EUR/USD hovers around 1.1380 on Friday after testing three-month lows in the 1.1350 area earlier in the day.
• German GfK Consumer Confidence for October dropped beyond expectations, as households struggle with high energy prices.
• Hawkish comments from Fed officials provided additional support for the US Dollar on Thursday.

The Euro (EUR) remains practically flat against the US Dollar on Friday, trading within a tight range around 1.1380, after dropping 0.8% this week and nearly 2% over the last two weeks. The US Dollar has been boosted by an aggressive Fed hawkish repricing and the soaring US Treasury yields, while the recent rebound in Oil prices adds pressure on the Euro.

Data from the Eurozone released on Friday has failed to provide support for the common currency, as the German GfK Consumer Confidence Index for October dropped to -30.6, its worst reading in the last five months, from –26.6 in the previous month, exceeding market expectations of a more moderate deterioration to -27.4.

The report shows that German consumers are struggling amid rising energy prices. The Income expectations sub-index declined to -15.0 from 1.7 in September, and consumers boosted their willingness to save to 21.5 from 15.5 in the previous month, with the corresponding decline in purchasing plans.

In this context, Oil prices remain at high levels, with the barrel of Brent Oil trading a few cents below the key $100 level, which poses a serious burden to the oil-importing eurozone economies.

Fed officials endorse market’s tightening expectations

The US Dollar, on the other hand, is outperforming its peers, with markets positioning for further interest rate hikes in the coming months. US PMI data released earlier this week revealed that business activity strengthened beyond expectations in September, with wages growing and high energy prices increasing costs. The report heightened expectations that the central bank will have to hike interest rates to keep US economy from overheating.

These views were endorsed y by Philadelphia Fed President Anna Paulson, who said earlier on Friday that “modest” rate moves are likely to be needed to bring inflation to target. A few hours earlier, the New York Fed President John Williams also stressed this point, affirming that “it is sensible to expect another rate increase by year-end.”

Strategists at OCBC note that “market pricing currently implies around a 70% probability of another 25bp rate hike in October, highlighting the market's growing conviction that the Fed's inflation fight is not yet over.” They add that “resilient US economic data, elevated energy prices and persistent inflation concerns continue to drive Treasury yields higher, underpinning the USD while weighing on rate-sensitive and carry-oriented assets.”