Softer US PPI brings little respite for euro under pressure

• Near its lowest level since May 2025, EUR/USD continues to face selling pressure.
• To contain inflation, further interest rate increases may be necessary, Fed officials indicate.
• With markets favouring further Fed tightening, expectations of ECB rate increases provide little support.

EUR/USD is near its lowest level since May 2025. Selling pressure persists on Friday, with the latest US producer inflation figures prompting little market response. Expectations of further Federal Reserve (Fed) tightening continue to underpin the US Dollar (USD).

Around 1.1048 at the time of writing, EUR/USD is heading for its third consecutive weekly decline. Meanwhile, the US Dollar Index (DXY) stands near 103.24, slightly below the 19-month peak of 103.30 reached earlier. The index measures the Greenback against a basket of six major currencies.

October's Producer Price Index (PPI) increased 0.3% MoM, slowing from September's 1.4% and falling short of the 0.4% forecast. On an annual basis, producer inflation accelerated from 6.3% to 6.5%, marginally below the expected 6.6%. Core PPI matched forecasts with gains of 0.3% MoM and 5.0% YoY.

Rate hike expectations barely eased following the report. Those expectations had strengthened this week as US consumer inflation exceeded forecasts and Fed officials advocated additional tightening.

Speaking on Friday, Chicago Fed President Austan Goolsbee said the direction of interest rates would depend on inflation, adding that the Fed still “has work to do” to reduce it. Dallas Fed President Lorie Logan had earlier this week urged “at least two more 25-basis-point rate increases.” Ahead of Tuesday's CPI release, Fed Governor Christopher Waller said a December increase of 50 basis points could be justified if October core CPI rose around 0.3% or more. The actual increase was 0.3%.

A December rate increase of 25 basis points (bps) is fully priced in, according to the CME FedWatch Tool, alongside a small probability of a 50 bps move. Traders also anticipate a further hike in January.

Preliminary Eurozone figures put third-quarter Gross Domestic Product (GDP) growth at 0.4% QoQ and 1.3% YoY, matching both forecasts. Quarterly employment was unchanged against expectations of a 0.2% rise. Annual employment growth, meanwhile, eased from 0.5% to 0.4%.

As it evaluates the transmission of higher energy costs to wages and other prices, the European Central Bank (ECB) reaffirmed this week that rate decisions would be taken meeting by meeting. Thursday's Reuters poll showed all 71 economists forecasting a 25-basis-point increase in the ECB deposit rate to 2.75% in December. Most expect that to conclude the tightening cycle. However, 25 anticipate a further increase, most likely in early 2027.