Euro struggles near May 2025 lows as Fed hawks keep Dollar supported
- EUR/USD holds near its lowest level since May 2025 amid persistent US Dollar strength.
- Higher-than-expected US jobless claims weigh on the Greenback, though hawkish Fed expectations limit the downside.
- ECB rate hike expectations offer limited support as concerns about Eurozone growth persist.
EUR/USD trades flat during Thursday’s American trading hours as the US Dollar (USD) gives back some ground after hitting a fresh year-to-date high. At the time of writing, the pair trades around 1.1087, up from an intraday low of 1.1066, its weakest level since May 2025.
The US Dollar Index (DXY) trades near 102.95 after reaching 103.08 earlier in the day. The Greenback lost some momentum after US Initial Jobless Claims rose to 200Kfrom 191K the previous week, above the 195K forecast. The four-week average held steady at 195.25K.
The Greenback remains supported by growing calls from Federal Reserve (Fed) officials for further rate hikes to bring inflation under control. Cleveland Fed President Beth Hammack said on Thursday that policy needs to become restrictive and that she is seeing higher energy costs feed through to other prices. She said smaller moves are less disruptive to the economy, though a larger hike could be needed if the Fed falls behind.
Earlier this week, Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson also backed further tightening. Fed Governor Christopher Waller said before Tuesday’s inflation report that a monthly core inflation reading around 0.3% could put a half-point December hike on the table.
Core inflation came in at 0.3% and traders now fully price in a December hike. A 25-basis-point (bps) move remains the favourite, with a small chance of a larger 50 bps increase. Markets also expect the Fed to keep raising rates into 2027.
Energy-driven inflation risks remain in focus after US President Donald Trump said on Truth Social that the US does not need a deal with Iran. Traders now turn to Friday’s US Producer Price Index (PPI) for the next read on inflation.
Euro outlook softens as ECB caution contrasts with Fed tightening
A Reuters poll published on Thursday showed all 71 economists surveyed expect the European Central Bank (ECB) to raise its deposit rate by 25 bps to 2.75% in December. Of those, 46 see December as the final hike of the cycle, while 25 expect another increase, most likely in the first quarter of 2027.
Strategists at Rabobank note that “the Fed is not the only G10 central bank widely expected to hike rates in December,” with the ECB “among those banks also likely to tighten policy.” However, they caution that “the ECB, however, could prove to be reluctant to hike rates beyond December,” pointing to signals from “the last ECB press conference” which “suggested that the GC were becoming increasingly concerned about the growth outlook.”
In Rabobank’s house view, “market pricing for 2027 ECB rate rises remains too aggressive,” and they add that “another factor that could weigh on the EUR in the coming months are uncertainties about what a far-right president in France could mean for EU cooperation going forward.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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