Euro Weakens Further

The euro weakened slightly below $1.16, as investors assessed the latest Eurozone inflation data and its implications for the ECB’s rate outlook. Annual inflation rose to 3.3% in August, its highest level since September 2023 and well above the ECB’s 2% target, driven largely by a surge in energy prices amid continued fighting in the Middle East. The data reinforced expectations of an ECB rate hike as soon as this month, despite easing services and core inflation. Markets are now pricing the deposit rate at around 2.70% by December, implying roughly an 80% probability of a second hike following an expected September move. ECB policymaker Olli Rehn warned that a prolonged conflict could keep inflation elevated, while Martin Kocher said rising inflation risks could require a swift rate hike if confirmed in the ECB’s next forecasts. Meanwhile, the dollar remained supported after Fed Chair Kevin Warsh struck a hawkish tone, with markets pricing a 66% probability of a September Fed hike.

The euro hovered around $1.16, near its weakest level in almost two weeks, as higher oil prices and renewed inflation concerns strengthened expectations for higher interest rates in both the euro area and the US. Oil prices rose after the US said it had attacked an Iranian island in the Strait of Hormuz, while Tehran said it had retaliated by targeting US assets in the region, adding to geopolitical and inflationary pressures. Markets are pricing the ECB’s deposit rate at around 2.70% by December, implying roughly an 80% probability of a second rate hike following an expected September move, from the current 2.25%. Investors also see euro-area rates approaching 3% by late 2027. Meanwhile, Fed Chair Kevin Warsh struck a hawkish tone on Friday, warning that inflation has not slowed meaningfully and that the Fed still has “work to do” without clearer evidence of easing price pressures. Markets now see roughly a 60% chance of a September Fed rate hike.

The euro weakened to around $1.16, touching its lowest level since August 19, as investors turned to the US dollar following hawkish remarks from Federal Reserve Chair Kevin Warsh, despite European data pointing to renewed inflationary pressures. In his first major speech since becoming chair in May, Warsh warned that inflation has not meaningfully slowed and that policymakers need clearer evidence of easing price pressures, otherwise the Fed still has “work to do.” Meanwhile, inflation data from France and Spain strengthened expectations for further ECB tightening. EU-harmonized inflation rose to 2.7% in France and 4.5% in Spain, the latter its highest since 2023. Markets now see the ECB deposit rate rising to 2.80% by March next year from 2.25% currently, with roughly a 60% chance of a hike to 3%. Recent ECB minutes and Reuters reports also pointed to a possible September hike, although policymakers remain reluctant to signal further tightening.