Euro hits two-week low on expectations of aggressive Fed rate rises

• Broad-based US Dollar gains push EUR/USD lower for a second consecutive day.
• US inflation above forecasts, alongside hawkish Fed comments, strengthens expectations of additional rate rises.
• The Euro remains under pressure from uncertainty surrounding French politics and public finances.

Expectations of a steeper Federal Reserve (Fed) interest rate-hiking path are gathering pace, supporting broad-based gains in the US Dollar (USD) and weighing on the Euro (EUR). Against this backdrop, EUR/USD falls for a second consecutive day, reaching a two-week low in Wednesday’s US trading session.

A daily decline of 0.42% leaves the pair trading near 1.1116 at the time of writing. The US Dollar Index (DXY), which measures the greenback against a basket of six major currencies, is hovering around 102.70, within reach of October’s year-to-date high of 102.94.

According to the CME FedWatch Tool, a December Fed rate rise is now fully priced in: markets assign an 88.5% probability to a 25-basis-point (bps) increase and an 11.5% probability to a larger 50 bps rise. Expectations extend to further tightening next year, with pricing pointing to three additional quarter-point increases by mid-2027.

Tuesday’s stronger-than-forecast US consumer inflation figures, together with Fed officials’ calls for additional monetary tightening, have prompted the reassessment of interest rate expectations. October’s US Consumer Price Index (CPI) increased by 0.4% MoM, exceeding the 0.3% forecast, though slowing from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3%, unchanged from September’s pace and above the 0.2% forecast.

Dollar risks skew higher as Waller remarks revive expectations of a 50bp Fed rise

For MUFG analysts, the policy backdrop rather than the inflation figures themselves has been the main driver of the latest repricing in rates, with “the market rethink … to consider the prospect of a 50bp hike.” Fed Governor Waller had suggested that “a stronger CPI print may warrant a 50bp hike.” The analysts emphasise that “this is only now being considered because of Waller’s comments before the CPI report rather than the CPI report itself,” linking the reassessment to his remarks.

Although MUFG continues to regard that outcome as “more a risk than a core view”, its analysts caution that it would “alter the current balanced expectations in the markets across key central banks and shift rate hike expectations much more in favour of the dollar.” Their assessment is that this would “likely prompt a further lurch lower in EUR/USD and bring levels below the 1.1000-level into play.”

In Europe, the Euro faces additional pressure from France’s continuing political and fiscal difficulties and uncertainty about a possible early departure by European Central Bank (ECB) President Christine Lagarde. These concerns persist despite the ECB’s hawkish policy stance. Markets are pricing in further increases in 2027, while traders expect a December rate rise that would be the central bank’s third this year.