Euro retreats below 1.1600, Dollar appreciates heading into the US CPI release 

• EUR/USD extends losses below 1.1600 on track for a moderate weekly decline.
• Markets await US CPI data with bets of a Fed rate hike on the rise.
• Risk aversion and Fed tightening hopes have offset the positive impact of the ECB's hawkish hike.

The Euro (EUR) accelerates its reversal against the US Dollar (USD) on Friday, as the impulse from a hawkish hike by the European Central Bank (ECB) fades. The EUR/USD pair trades at weekly lows near 1.1590 at the time of writing, down from 1.1650 highs earlier in the week, as investors await the release of US Consumer Price Index (CPI) data to support growing hopes that the Federal Reserve (Fed) will hike interest rates next week.

Futures markets are pricing a 67% chance of a quarter-point rate hike after the September 15-16 Fed meeting, up from 50% in the previous week, according to data from the CME’s FedWatch Tool.

Investors ramped up bets on Fed monetary tightening on Thursday, after US Producer Price Index (PPI) figures showed that inflation at the factory gate accelerated to a 5.4% year-on-year (Y-o-Y) pace in August, from 4.8% in July. Likewise, the core PPI increased to a 4.6% Y-o-Y rate from 4.3% in the previous month.

US inflation data and Fed uncertainty keep Dollar traders on edge

The US CPI release, due later, is seen as the last piece of data to complete the Fed's monetary policy puzzle. Analysts at Commerzbank, however, observe that the market is "anticipating several interest rate rises totalling 80 basis points by the middle of next year,” which, in their opinion, might be a long shot, as policymakers may argue that “while the headline rate is rising due to higher energy prices, the core rate remains moderate (today’s forecast is 0.2% month-on-month),” which might give arguments to the dovish side of the board to keep rates on hold.

Commerzbank also states that “at present, no one can accurately gauge the new Fed Chair’s willingness to raise interest rates,” and that, therefore, "even if today’s figure sends a clear signal, this does not necessarily mean that the Fed (and thus the USD) will ultimately pick it up.”

In the Eurozone, the European Central Bank (ECB) met expectations on Thursday and raised its benchmark Rate on the Deposit Facility by 25 basis points to 2.5% for the second consecutive time. ECB President Christine Lagarde conveyed a hawkish message, affirming that inflation will remain above the bank's 2% target until "well into 2027," which leaves the door open for further monetary tightening.