Euro Holds at Over One-Week Low

The euro held around $1.16, near its weakest level in more than a week, as the dollar remained supported by growing expectations that the Federal Reserve will raise interest rates next week following hotter-than-expected US core inflation data. In Europe, the ECB raised rates by 25 basis points on Thursday, warning that inflation is likely to remain well above its 2% target for an extended period. ECB President Christine Lagarde called the decision a “no-brainer” and cautioned that the return to target, currently projected for the end of 2027, could be delayed further. With the inflation outlook deteriorating sharply, further tightening is increasingly seen as likely, according to sources familiar with the discussions, with another hike potentially coming as soon as October. Money markets are pricing in three additional ECB rate increases by March next year, followed by a fourth by June.

The euro weakened to around $1.16 on Friday as the dollar remained supported ahead of key US CPI data due later today, while investors continued to assess the European Central Bank’s latest policy decision and the outlook for further rate hikes. The ECB raised interest rates by 25 basis points on Thursday, warning that inflation is likely to remain well above its 2% target for an extended period. ECB President Christine Lagarde described the decision as a “no-brainer” and cautioned that the return of inflation to target, currently projected for the end of 2027, could be delayed further. The inflation outlook has deteriorated so sharply that further monetary tightening is now considered increasingly likely, according to sources familiar with the discussions, with another rate hike potentially coming as soon as October. Money markets are pricing in three additional ECB rate increases by March next year, followed by a fourth hike by June.

The euro weakened toward $1.16 after the ECB raised rates as expected and upgraded its inflation and growth forecasts, while the dollar strengthened on higher oil prices and US PPI data. The ECB delivered its second rate hike since the US-Iran war began, warning that inflation is likely to remain well above its 2% target for an extended period. The central bank kept its 2026 inflation forecast at 3.0% but raised projections for 2027 and 2028 to 2.5% and 2.1%. GDP growth forecasts were also upgraded to 0.9% for 2026 and 1.4% for 2027. Renewed energy-price pressures are adding to the inflation outlook, with Brent crude hitting $105 a barrel and European gas prices reaching fresh three-and-a-half-year highs amid escalating Middle East tensions. Markets now price another ECB hike by December and further tightening in 2027. Elsewhere, the dollar remained supported after stronger-than-expected US PPI lifted the implied probability of a Fed hike to over 70%.