Euro Slips to Two-Month Low

The euro ended the week below the $1.14 threshold, marking its weakest level in two months, as the US dollar remained supported by growing expectations of further Federal Reserve rate hikes this year. Hawkish remarks from Fed officials, coupled with a string of economic data pointing to robust growth and a resilient labor market, reinforced expectations of tighter US monetary policy. Meanwhile, in Europe, the US-Iran conflict and recent energy-price developments continued to stoke concerns over renewed inflationary pressure. Money markets are pricing in roughly 100 basis points of interest-rate hikes by the end of October 2027. On the economic data front, German consumer sentiment deteriorated more sharply than expected heading into October, as rising energy prices weighed on households’ income expectations.

The euro remained below $1.14, hovering near its weakest level in nearly two months, as the dollar strengthened amid expectations that the Federal Reserve could deliver further interest rate hikes this year following stronger-than-expected US PMI data and a series of hawkish remarks from Fed policymakers. Rising oil prices, amid persistent uncertainty surrounding US-Iran talks, also weighed on risk-sensitive assets. Meanwhile in Europe, data showed that German business sentiment improved more than expected in September, reaching its highest level in more than three years, following stronger-than-expected PMI data released on Wednesday. Eurozone private-sector activity also expanded at its fastest pace in nearly three and a half years, reinforcing expectations of further monetary tightening by the European Central Bank. Money markets are now pricing in at least one 25-basis-point ECB rate hike by year-end, with around a 40% probability of a second.

The euro extended its decline below $1.14, touching a fresh near two-month low as the dollar strengthened following stronger-than-expected US PMI data and a series of hawkish remarks from Federal Reserve policymakers, reinforcing expectations of further monetary tightening. A rebound in oil prices, amid persistent uncertainty surrounding US-Iran talks, also weighed on risk-sensitive assets. Meanwhile, investors digested stronger-than-expected PMI data showing that eurozone private-sector activity expanded in September at its fastest pace in almost three-and-a-half years, strengthening expectations that the ECB could raise interest rates further this year. ECB official Joachim Nagel said Tuesday that oil prices were becoming an increasingly important factor in monetary-policy decisions and left the door open to further rate hikes. Chief Economist Philip Lane, meanwhile, warned that another surge in energy prices could keep eurozone inflation elevated for longer than expected.