|

Euro tumbles to one-month low as Fed rate hike bets dominate

  • EUR/USD stays under pressure as the US Dollar strengthens ahead of this week’s Fed decision.
  • Markets increasingly expect the Fed to raise borrowing costs on Wednesday.
  • Rising Oil prices keep inflation risks elevated on both sides of the Atlantic.

EUR/USD trades under pressure on Monday, with the Euro (EUR) losing around 0.55% against the US Dollar (USD). The Greenback strengthens across the board as traders position for a possible Federal Reserve (Fed) interest rate hike at the September 15-16 monetary policy meeting. At the time of writing, EUR/USD trades around 1.1525, near its lowest level since August 13.

Expectations for tighter Fed policy gained traction after Friday’s US inflation report showed headline Consumer Price Index (CPI) rising 0.4% MoM in August, accelerating from 0.1% in July. Core CPI increased 0.3%, up from 0.2% and marking its fastest pace in four months. According to the CME FedWatch Tool, markets price in an 86% probability of a quarter-point rate increase, up from around 59.4% a week earlier.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.66, up roughly 0.58% on the day and at its highest level since September 3. Strategists at Scotiabank note that the firm tone in the USD ahead of the FOMC is consistent with derivatives market signals, pointing out that “in recent years, swaps pricing which indicated 70% or higher risk of a Fed rate move has been a near perfect indicator of a policy move, so dollar gains in response to swaps pricing is understandable.”

They caution, however, that “there are still some risk around the outlook,” stressing that the currency’s reaction will hinge on how the Fed delivers any change in policy. In their view, “an unchanged decision from the Fed would be a shock for markets and a clear negative for the USD,” while even a “dovish” hike “which does not obviously commit to additional moves would also likely weigh on the USD.”

Rising Oil prices are adding to inflation concerns and putting further pressure on the Fed to raise borrowing costs. West Texas Intermediate (WTI) Oil trades near the $100 mark, having gained more than 15% so far this month.

Elevated Oil prices have also complicated the Eurozone inflation outlook. Last week, the European Central Bank (ECB) delivered its second rate hike of the year, lifting the deposit facility rate to 2.50%. ECB Executive Board member Isabel Schnabel said on Monday that recent energy-price developments are “quite concerning,” while policymaker Yannis Stournaras said timely action reduces the risk of more painful rate increases later.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

More from Vishal Chaturvedi
Share:

Editor's Picks

AUD/USD edges higher above 0.7050 as hot CPI lifts RBA rate hike odds

The AUD/USD pair gathers strength to near 0.7055 during the Asian trading hours on Thursday. The Australian Dollar edges higher against the US Dollar as hotter inflation data bolsters expectations of Reserve Bank of Australia rate hikes. The US September Personal Consumption Expenditures inflation report will be in the spotlight later on Thursday.



USD/JPY treads water near 158.00 ahead of BoJ

USD/JPY navigates an inconclusive range around the 158.00 neighbourhood ahead of the opening bell in Asia on Friday. Indeed, the pair alternates gains with losses following Wednesday’s decent pullback as investors gear up for the imminent interest rate decision by the BoJ. In the meantime, market consensus expect the central bank to keep its hands steady.

Gold remains sidelined just above $4,000

Gold leaves behind the recent three-day positive streak and faces renewed selling pressure near the $4,000 mark per troy ounce on Thursday. The precious metal’s daily decline comes amid marginal gains in the US Dollar and mixed US Treasury yields, while crude oil prices remain on the back foot.

HYPE soars 17% as ICE, Druckenmiller invest in tradeXYZ for US expansion
Hyperliquid (HYPE) jumps 17% on Thursday as Intercontinental Exchange (ICE) announced it will partner with trade[XYZ] to bring Hyperliquid-based perpetual futures markets to the US, expanding efforts to introduce on-chain derivatives trading within a regulated framework. Billionaire investor Stan Druckenmiller will also join as an investor in trade[XYZ].
BoJ preview: Hawkish hold

Having hiked rates by 25bp to 1.25% in September, the central messages from the BoJ were largely similar; upside price risks remained, real interest rates were still negative and further policy rate hikes should be expected.

A hot US economy is supposed to sink Gold. It didn't. Here's why
Gold (XAU/USD) remains under pressure near $4,000, as stronger-than-expected United States (US) economic data reinforce expectations of another Federal Reserve (Fed) interest rate hike in December. Economic growth is accelerating, inflation remains elevated, and borrowing costs could rise further.