Two-week low: euro slides on expectations of aggressive Fed rate hikes

• A second consecutive day of losses weighs on EUR/USD. The US Dollar advances broadly.
• Bets on additional rate rises build as US inflation exceeds forecasts and Fed officials deliver hawkish comments.
• The Euro remains under pressure from uncertainty surrounding French politics and public finances.

A two-week low marks the latest decline in EUR/USD. The pair extends its losses for a second consecutive day during Wednesday’s American session. Broad US Dollar (USD) strength weighs on the Euro (EUR) as expectations build for a more aggressive interest rate-hike path from the Federal Reserve (Fed).

At around 1.1116 at the time of writing, the pair is 0.42% lower on the day. The US Dollar Index (DXY) stands near 102.70, closing in on its year-to-date peak of 102.94 set in October. The index measures the Greenback against a basket of six major currencies.

A December Fed rate increase is now fully priced in. According to the CME FedWatch Tool, markets assign an 88.5% probability to a 25-basis-point (bps) rise and an 11.5% probability to a larger 50 bps increase. Pricing also points to further tightening next year, with three additional quarter-point rises expected by mid-2027.

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

50bp Fed hike returns to focus after Waller remarks, favouring the Dollar

The policy backdrop, rather than the inflation figures alone, has been the main driver of the latest rates repricing, according to MUFG analysts. They describe “the market rethink … to consider the prospect of 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,” referring to Fed Governor Waller’s suggestion that “a stronger CPI print may warrant a 50bp hike.”

For MUFG, that outcome remains “more a risk than a core view”. Even so, the 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.” They argue that this would “likely prompt a further lurch lower in EUR/USD and bring levels below the 1.1000-level into play.”

Despite the European Central Bank’s (ECB) continued hawkish stance, the Euro faces additional pressure from France’s unresolved political and fiscal difficulties. Uncertainty about a possible early departure by ECB President Christine Lagarde also weighs on the currency. Another rate rise is anticipated in December, which would be the central bank’s third increase this year. Traders are also pricing in additional increases in 2027.