Euro Remains Under Pressure Against US Dollar as Fed Rate Hike Expectations Strengthen

The euro remained on the defensive against the US dollar on Friday, with EUR/USD trading near 1.1050 and hovering close to its weakest level since May 2025. The currency pair was heading towards a third consecutive weekly decline as expectations of further Federal Reserve interest-rate increases continued to support the greenback.

The latest US Producer Price Index (PPI) figures offered little relief to the euro. Although monthly producer inflation came in below expectations, markets remained focused on persistent underlying inflation pressures and increasingly hawkish comments from Federal Reserve officials.

Meanwhile, expectations of another European Central Bank (ECB) rate increase in December provided limited support for the single currency, as investors continued to favour the prospect of further US monetary tightening.

EUR/USD Market Snapshot

Current Price Action: Euro Struggles Near Multi-Month Lows

EUR/USD remained under selling pressure on Friday, trading around 1.1050 as the US dollar maintained its recent strength.

The pair was approaching its third consecutive weekly decline, reflecting the growing difference between US and eurozone monetary policy expectations.

The US Dollar Index traded near 103.20, just below its recent 19-month high of 103.30. The dollar’s resilience has made it difficult for the euro to establish a meaningful recovery, even as expectations of further ECB tightening remain elevated.

The latest US inflation figures did little to change the market’s direction, with investors continuing to focus on the possibility of additional Federal Reserve rate increases.

US Inflation: Softer PPI Fails to Weaken Dollar Demand

October’s US Producer Price Index increased by 0.3% month-on-month, below the market forecast of 0.4% and significantly lower than September’s 1.4% increase.

Annual producer inflation, however, accelerated to 6.5% from 6.3%, although the reading remained slightly below the 6.6% forecast.

Core PPI increased by 0.3% month-on-month and 5.0% year-on-year, both in line with expectations.

Despite the softer monthly headline figure, the report failed to reduce expectations of further monetary tightening.

Markets continued to price in a 25-basis-point Federal Reserve rate increase in December, alongside a smaller possibility of a 50-basis-point move. Expectations also included another increase in January.

Federal Reserve: Officials Signal Further Rate Increases

Comments from Federal Reserve policymakers have reinforced the dollar’s positive momentum.

Chicago Fed President Austan Goolsbee said on Friday that inflation would determine the direction of interest rates and indicated that the central bank still had more work to do to bring price pressures under control.

Earlier in the week, Dallas Fed President Lorie Logan called for at least two additional 25-basis-point rate increases.

Fed Governor Christopher Waller had also indicated before the October CPI release that a 50-basis-point increase in December could be warranted if core inflation reached approximately 0.3% or higher. The eventual reading came in at 0.3%.

These comments have strengthened expectations that the Federal Reserve may continue tightening monetary policy, creating a supportive environment for the US dollar relative to the euro.

Energy Prices: Higher Oil Costs Add to Inflation Concerns

Higher energy prices are adding another complication to the US inflation outlook.

Crude oil has recovered from recent lows following President Donald Trump’s comments that Washington did not need a deal with Iran to end the war.

The possibility of further geopolitical disruption in the Middle East continues to create uncertainty around energy supply and pricing.

If higher oil prices feed through into transportation, production and consumer costs, inflation could remain elevated for longer, potentially reinforcing the case for further Federal Reserve tightening.

Eurozone Economy: GDP Growth Meets Expectations

On the eurozone side, preliminary third-quarter economic data showed GDP growth of 0.4% quarter-on-quarter and 1.3% year-on-year. Both readings were in line with market expectations.

However, employment figures provided a less encouraging signal.

Eurozone employment remained unchanged during the quarter, missing expectations for an increase of 0.2%. Annual employment growth also slowed to 0.4% from 0.5%.

The combination of moderate economic growth and weaker employment momentum presents a challenge for the ECB as it considers the appropriate pace of monetary tightening.

European Central Bank: December Rate Hike Expectations Provide Limited Support

The European Central Bank reiterated that future interest-rate decisions would be assessed on a meeting-by-meeting basis, with policymakers monitoring how higher energy costs influence wages and broader inflation.

According to Thursday’s Reuters economist poll, all 71 economists surveyed expected the ECB to raise its deposit rate by 25 basis points to 2.75% in December.

Most economists considered this likely to be the final increase of the current tightening cycle, although 25 expected another rate increase, most likely in early 2027.

Although the expected December increase offers some support for the euro, the market’s stronger expectations for further Federal Reserve tightening have limited its positive impact on EUR/USD.

Bullish Sentiment

1. ECB tightening expectations: All 71 economists in the Reuters poll expected a 25-basis-point ECB deposit rate increase in December, potentially supporting the euro.
2. Eurozone GDP meets forecasts: Third-quarter GDP growth of 0.4% quarter-on-quarter and 1.3% year-on-year matched expectations.
3. Softer monthly US PPI: October headline producer inflation rose 0.3%, below the 0.4% forecast, offering a potential counterweight to hawkish Fed expectations.
4. Potential moderation in US inflation: A sustained easing in producer-price pressures could eventually reduce expectations of further Federal Reserve tightening.

Bearish Sentiment

1. EUR/USD near multi-month lows: The pair remained around 1.1050, close to its weakest level since May 2025.
2. Dollar strength: The US Dollar Index remained near its 19-month high, maintaining pressure on the euro.
3. Hawkish Federal Reserve commentary: Officials have indicated that additional rate increases may be necessary to control inflation.
4. Further US rate hikes priced in: Markets were fully pricing a 25-basis-point December increase, with a possibility of a larger move and another increase in January.
5. Eurozone employment stagnation: Employment was flat in the third quarter, missing expectations for growth.
6. Higher energy costs: Rising oil prices could keep inflationary pressures elevated and reinforce expectations of tighter US monetary policy.

EUR/USD Forecast: What Traders Are Watching

The near-term outlook for EUR/USD remains under pressure while expectations of further Federal Reserve tightening continue to support the US dollar.

The 1.1050 area remains an important reference point as the pair trades close to its weakest level since May 2025. A sustained move lower could reinforce the existing bearish trend, particularly if further Federal Reserve commentary supports expectations of additional rate increases.

On the other hand, a more sustained moderation in US inflation could eventually reduce the dollar’s yield advantage and create room for a euro recovery.

Traders will also monitor the ECB’s December policy outlook. Although another rate increase is widely expected, the perception that this could be the final move of the current cycle may limit the euro’s ability to attract sustained buying interest.

Market Outlook for the Coming Sessions

EUR/USD enters the coming sessions with a bearish bias, as the US dollar continues to benefit from expectations of additional Federal Reserve tightening.

The softer monthly US PPI reading has provided little relief, particularly as annual producer inflation increased and Fed officials continue to emphasise the need to bring inflation under control.

The euro has some support from expectations of a December ECB rate increase, but weaker employment momentum and the possibility that this will be the final hike of the cycle limit the currency’s appeal.

For now, the direction of EUR/USD is likely to remain closely tied to the difference between Federal Reserve and ECB policy expectations, developments in energy prices and incoming inflation data.

A sustained recovery will require clearer evidence that US monetary tightening expectations are easing. Until then, the euro remains vulnerable to further downside pressure against the dollar.

Currency Hedger – Market Contributor

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Disclaimer: This article is provided for informational and educational purposes only. It does not constitute investment advice, financial advice or a recommendation to buy or sell any currency or financial instrument. Foreign exchange markets involve substantial risk, and exchange rates can be highly volatile. Traders should conduct their own research and consider their financial circumstances before making investment decisions.

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