Euro Holds Near One-Month Low Ahead of Fed Decision

The euro edged higher to approach $1.15, trading at a two-week high, as the US dollar weakened after the Fed left interest rates unchanged, broadly in line with expectations, despite markets assigning roughly a one-in-three probability to a rate hike. While the central bank reaffirmed its commitment to price stability, it offered little in the way of forward guidance. In the euro area, money markets are pricing in nearly two 25-basis-point ECB rate hikes by March 2027. ECB policymaker Peter Kazimir said at least one more increase will likely be needed to bring inflation under control, adding that a weaker economic outlook could warrant even more tightening than markets currently expect. Meanwhile, Chief Economist Philip Lane said the current inflation shock remains moderate, supporting further policy tightening. Investors now await euro area inflation data later this week for fresh clues on the ECB's policy path.

The euro remained under pressure below the $1.14 mark, hovering near its weakest level in a month as renewed US-Iran hostilities lifted oil prices and reignited inflation concerns. Investors also remained cautious ahead of the Federal Reserve's policy decision later in the day, with the central bank widely expected to leave interest rates unchanged, although markets still assign roughly a one-third chance of a 25-basis-point hike. In the euro area, money markets are pricing in nearly two 25-basis-point ECB rate hikes by March 2027. ECB policymaker Peter Kazimir said at least one more increase will likely be needed to bring inflation under control, adding that a weaker economic outlook could warrant even more tightening than markets currently expect. Meanwhile, Chief Economist Philip Lane said the current inflation shock remains moderate, supporting further policy tightening. Investors now await euro area inflation data later this week for fresh clues on the ECB's policy path.

The euro slipped below $1.14, touching its weakest point in a month, as investors continued to monitor developments in the Middle East while the dollar found support from lingering expectations that the Federal Reserve could still raise interest rates on Wednesday. Although a pause in US attacks on Iran pushed oil prices lower and eased inflation concerns, US Treasury yields retreated only modestly, reflecting continued caution. In Europe, money markets slightly pared expectations for additional ECB tightening but still price in nearly two 25 bp rate hikes by March 2027. ECB policymaker Peter Kazimir said at least one more rate increase will likely be needed to curb inflation, adding that a weaker economic outlook could justify even more tightening than markets currently anticipate, while Chief Economist Philip Lane said the current inflation shock remains moderate, supporting further policy tightening. Investors now await fresh inflation data later this week for further policy clues.