Euro softens to near 1.1350 as Fed hike bets rise ahead of PCE inflation data
- EUR/USD weakens to near 1.1355 in Thursday’s early Asian session.
- Traders have ramped up bets of a US rate hike by September.
- The US PCE Price Index report for May will be in the spotlight on Thursday.
The EUR/USD pair declines to around 1.1355 during the early Asian trading hours on Thursday. The Euro (EUR) weakens to its lowest level since June 2025 against the US Dollar (USD) as traders increase their bets on US interest rate hikes later this year. The US May Personal Consumption Expenditures (PCE) inflation data will be the highlight on Thursday.
Traders brace for anticipated interest rate hikes from the Federal Reserve (Fed) this year since new Chairman Kevin Warsh signaled a focus on inflation as the overall economy appears to be on a stable footing. Markets are now pricing in a 34.2% probability of a 25-basis-point hike at the July meeting, up from 8.5% a week ago, and 66.4% for September, up from 29.1%, according to the CME FedWatch tool.
"The dollar's strength right now, at the end of the day, it's still hawkishness, if you look at Fed expectations with Fed funds futures right now, they are some of the highest odds that we've seen in a while," said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut.
Traders will take more cues from the US Personal Consumption Expenditures (PCE) Price Index report for May on Thursday. The headline PCE is expected to show a rise of 4.1% YoY in May, compared to 3.8% in April. The core CPE inflation is projected to rise to 3.4% YoY in May, up from 3.3% in April.
Easing tensions between the US and Iran helps to cool oil prices and raise expectations that the European Central Bank (ECB) will turn more dovish. This, in turn, could drag the shared currency in the near term. The ECB decided to raise the key interest rates by 25 bps earlier this month. The central bank hikes interest rates despite a slowing economy to combat surging inflation triggered by the oil price shock amid the Iran war.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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