Euro Sinks to 3-Month Low as Odds of Fed Hike Reach 73 Percent
The EUR/USD pair fell 0.3% to 1.1332, its lowest since June 24, when it stood at 1.1324.
Markets now put the probability of a 25-basis-point Fed rate hike in October at 73%. Traders are less sure whether policymakers will hold or raise rates in December. Persistent inflation worries have also fueled speculation that the central bank could tighten again before year-end and keep its hawkish posture into next year.
Geopolitical tensions in the Middle East are threatening energy supplies and complicating the fight against rising prices. With oil climbing, central banks worldwide may need to speed up their tightening to contain inflation risks.
The next test comes this week, when U.S. employment and nonfarm payrolls data are due. The figures could sway the Fed's next moves.
Piotr Matys, senior foreign exchange analyst at In Touch Capital Markets, told Anadolu that U.S. and European bond markets have diverged because of country-specific developments and oil price swings, a split now showing up in the currency market.
“With yields spread widening in favor of the dollar, the EUR/USD continues to lean lower despite momentum indicators a bit stretched,” he said. “The euro could be particularly sensitive to a fresh set of US data that will be released throughout this week, culminating with non-farm payrolls on Friday.”
Matys added that if the data undercuts hawkish expectations, the pair could see a corrective rebound or move sideways.
Kit Juckes, head of foreign exchange strategy at Societe Generale, told media that the euro has dropped below its late-June low.
“That it held up for so long is testament to the success of President Trump’s verbal campaign to hold down the dollar, but elevated oil prices, a strong economy, high bond yields, and Federal Reserve policy tightening are too powerful a force to be talked away,” he said. “How much further we go in the short term, may depend on this week’s US inflation, employment, and ISM (Institute of Supply Management) data, but as long as energy prices are this elevated, a slow grind lower for EUR/USD seems the path of least resistance.”
Juckes said the euro's gradual decline is likely to continue as long as energy prices stay this high.
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