The Euro (EUR) has dropped to a four-week low against the US Dollar (USD), trading near 1.1565 during Monday’s European session. The currency pair is experiencing pressure as market participants increase their expectations for hawkish policy decisions from the US Federal Reserve.

This shift in sentiment follows the release of sticky United States (US) Consumer Price Index (CPI) data for August, alongside hotter-than-expected US Producer Price Index (PPI) growth reported last week. These figures have accelerated bets that the Federal Reserve will raise interest rates further at its upcoming September policy meeting, making the US Dollar a more attractive prospect for investors.

US Inflation Fuels Dollar Strength

The latest CPI report, released on Friday, indicated that headline inflation remained at 3.4% Year-on-Year (YoY) in August, aligning with expectations. While the core CPI, which excludes volatile food and energy items, cooled slightly to 2.4% from 2.5% in July, other monthly figures showed faster growth. Month-on-month headline CPI increased by 0.4%, matching expectations and significantly up from the previous reading of 0.1%. Similarly, month-on-month core CPI rose by 0.3%, exceeding both expectations and the prior release of 0.2%, as detailed by FXStreet.

Such faster growth in monthly inflation data has significantly bolstered expectations for the Federal Reserve to adopt a more hawkish stance on interest rates. Historically, when prices rise too quickly and inflation surpasses the Fed’s 2% target, the central bank typically raises interest rates to curb borrowing costs, which in turn strengthens the US Dollar by attracting international investment.

ECB’s Non-Committal Stance

In contrast, while the European Central Bank (ECB) did hike policy rates last week as anticipated, it offered no clear guidance on its future interest rate trajectory. ECB President Christine Lagarde stated during a press conference that “Discussion was focused on today’s decision, did not debate future rate path,” adding, “Can’t anticipate what will be the next move.”

This lack of firm commitment from the ECB has contributed to the Euro’s struggles. TradingView reported that the Euro was down nearly 1% against the US Dollar, nearing its weakest level since late July, as traders began to scale back their expectations for additional ECB rate hikes. Some analysts suggest that markets may have over-priced the likelihood of further hikes, considering that higher energy prices could impede economic growth and alleviate inflationary pressures organically. Money markets now price the ECB deposit rate just below 2.9% by December, indicating approximately a 50% chance of a second hike this year.

Technical Outlook for EUR/USD

From a technical perspective, the EUR/USD pair trades at 1.1565, maintaining a mildly bearish near-term bias. It remains below its 20-period exponential moving average (EMA) at 1.1602, suggesting that any attempts to move higher are likely to be capped. The Relative Strength Index (RSI) currently sits at 45, indicating a loss of bullish momentum rather than outright oversold conditions.

Initial resistance for the pair is identified at the 20-period EMA of 1.1602. A daily close above this benchmark would be required to alleviate current selling pressure and potentially pave the way for higher valuations. Conversely, should the pair fail to hold immediate support at 1.1560, it could become exposed to the psychological level of 1.1500.

Frequently Asked Questions

• Why is the Euro falling against the US Dollar?

  The Euro is falling due to accelerating hawkish Federal Reserve interest rate bets following strong US inflation data, combined with the European Central Bank’s non-committal stance on future rate hikes.

• What US economic data influenced the Euro’s decline?

  Sticky US Consumer Price Index (CPI) data for August, particularly faster month-on-month growth, and hotter-than-expected US Producer Price Index (PPI) growth contributed to the decline.

• What was the European Central Bank’s position on future interest rates?

  ECB President Christine Lagarde stated that discussions focused on the immediate rate decision and did not debate the future rate path, indicating an inability to anticipate the next move.