Euro falls to two-week low amid expectations of aggressive Fed rate hikes

• EUR/USD falls for a second straight day as the US Dollar strengthens across the board.
• Hotter-than-expected US inflation and hawkish Fed remarks fuel bets on further rate hikes.
• Uncertainty over French politics and public finances remains a drag on the Euro.

EUR/USD extends losses for the second straight day, slipping to a two-week low during Wednesday's American trading hours. The Euro (EUR) comes under pressure as the US Dollar (USD) strengthens across the board amid growing expectations of a more aggressive Federal Reserve (Fed) interest rate-hike path.

At the time of writing, the pair trades around 1.1116, down 0.42% on the day. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 102.70, approaching the year-to-date high of 102.94 reached in October.

Markets are now fully pricing in a Fed rate hike in December, with an 88.5% chance of a 25-basis-point (bps) increase and an 11.5% chance of a larger 50 bps move, according to the CME FedWatch Tool. Traders also expect further tightening next year, with three additional quarter-point increases priced in by mid-2027.

The shift in rate expectations follows hotter-than-expected US consumer inflation data released on Tuesday, along with calls from Fed officials for further monetary tightening. The US Consumer Price Index (CPI) rose 0.4% MoM in October, above the 0.3% forecast but down from 0.6% in September. Core CPI, which excludes food and energy, rose 0.3%, matching September’s pace and beating the 0.2% forecast.

Waller comments revive talk of 50bp Fed move and tilt risks toward the Dollar

Analysts at MUFG note that the latest repricing in rates has been driven less by the inflation data itself and more by the policy backdrop, with “the market rethink … to consider the prospect of a 50bp hike.” They stress that “this is only now being considered because of Waller’s comments before the CPI report rather than the CPI report itself,” after Fed Governor Waller suggested that “a stronger CPI print may warrant a 50bp hike.”

MUFG still sees such an outcome “more a risk than a core view”; they warn it would “alter the current balanced expectations in the markets across key central banks and shift rate hike expectations much more in favour of the dollar.” In turn, they argue this would “likely prompt a further lurch lower in EUR/USD and bring levels below the 1.1000-level into play.”

Across the Atlantic, persistent political and fiscal challenges in France, along with uncertainty over the possibility of an early departure by European Central Bank (ECB) President Christine Lagarde, add to the pressure on the Euro, even as the ECB maintains a hawkish policy stance. Traders anticipate another rate hike in December, which would mark the central bank's third increase this year, while also pricing in further increases in 2027.