Euro weakens to two-month low as Fed rate bets lift US Dollar

• The Euro continues to weaken against the US Dollar, hitting a fresh two-month low.
• Expectations of additional US rate hikes continue to support the Greenback.
• Weak economic prospects in Germany weigh on the single currency.

EUR/USD trades around 1.1475 on Thursday at the time of writing, down 0.22% on the day and hovering near its lowest level in two months. The pair extends its decline from the area above 1.1600 reached earlier this week, as the US Dollar (USD) continues to benefit from the Federal Reserve’s (Fed) hawkish policy outlook.

The Fed left its benchmark interest rate unchanged within the 3.5%-3.75% range on Wednesday, in line with market expectations. However, updated economic projections showed that roughly half of the Federal Open Market Committee (FOMC) members still expect at least one additional rate hike before the end of the year. During his first press conference as head of the central bank, Fed Chair Kevin Warsh reaffirmed his commitment to bringing inflation sustainably back to the 2% target, highlighting the resilience of the US labor market and persistent underlying inflation pressures.

US economic data released on Thursday also reinforced that view. Initial Jobless Claims fell to 226K in the week ending June 13 from 230K previously, while Continuing Jobless Claims rose to 1.81M. The figures suggest that the labor market remains strong enough for the central bank to maintain a restrictive policy bias.

This monetary policy outlook continues to support the US Dollar, even as geopolitical concerns have eased somewhat following the announcement of a preliminary agreement between the United States (US) and Iran aimed at ending hostilities in the Middle East. According to Rabobank, a lasting improvement in geopolitical conditions could reduce demand for safe-haven assets, but the impact of the Fed’s hawkish shift is currently dominating currency market dynamics.

On the European side, economic prospects remain unfavorable for the single currency. Germany’s IFO Institute confirmed its outlook for weak growth and elevated inflation in Europe’s largest economy. The institute expects inflation to average 2.9% this year and 2.7% in 2027, while economic growth is forecast at just 0.8% this year and next year. These projections reinforce concerns about the region’s economic momentum.

Meanwhile, European Central Bank (ECB) Chief Economist Philip Lane stated that further rate hikes remain justified even under a milder economic scenario. He added that the ECB could look through temporary shocks if they are not expected to have a lasting impact on inflation. Despite these comments, investors remain more concerned about slowing growth in the Eurozone than the risk of additional monetary tightening.