Euro Little-Changed as Geopolitics and ECB Hike Bets Weigh

The euro traded just below $1.15, near its weakest level since late July, and was down 1% against the dollar for the week as markets responded to a more hawkish tone from the Federal Reserve. US policymakers unanimously raised the federal funds rate to 3.75%-4.00% on Wednesday, marking the first hike since July 2023, while signaling another increase later this year. At the same time, some analysts argued that markets may have overpriced further ECB tightening, pointing to the potential for higher energy costs to weaken growth and eventually ease inflationary pressures. Money markets now price the ECB deposit rate at just below 2.9% by December, implying roughly a 50% chance of another hike this year. Elsewhere, the Bank of England held rates steady on Thursday but warned that a prolonged Middle East conflict could warrant tighter policy, while the Bank of Japan raised rates to a 31-year high and signaled further tightening ahead.

The euro traded just below $1.15, remaining at its weakest level since late July, as the dollar strengthened after the Federal Reserve raised interest rates yesterday and signalled another hike later this year. US policymakers unanimously lifted the benchmark federal funds rate to a range of 3.75% to 4% on Wednesday, the first increase since July 2023, as they seek to contain rising inflation. Updated FOMC projections also showed that a strong majority of officials see another hike as possible later this year. Meanwhile, investors are still pricing in at least one more ECB rate hike this year, although expectations for further tightening have eased as oil prices fall for a second consecutive day. Brent is around $105 a barrel after Saudi Arabia said it plans to restore roughly half the capacity of its damaged East-West pipeline within days. The Middle East outlook remains uncertain, however, keeping oil prices elevated and complicating the task of central banks battling inflation.

The euro stabilized around $1.155, close to its weakest level in a month, as the US dollar remained supported ahead of today’s Federal Reserve decision. US policymakers are widely expected to raise interest rates by 25 basis points, marking the first hike in three years, with markets also looking for guidance on the prospect of further tightening. Meanwhile, investors have increased bets on further European Central Bank rate hikes amid renewed inflation concerns. Markets are now pricing the ECB deposit rate at around 2.9% by December, up from the current 2.5%. Further out, the rate is seen reaching 3.4% by November 2027, fully pricing a third hike and implying roughly a 50% probability of a fourth. The ECB raised rates last week for the second time this year to contain an energy-driven rise in inflation, while warning that price pressures could prove persistent, reinforcing expectations for further tightening.