The Euro stabilized against the US Dollar on Friday after a volatile reaction to the US Consumer Price Index (CPI) report, which came broadly in line with expectations. The headline CPI rose 0.4% month-on-month in August, matching forecasts and accelerating from July's 0.1% increase, while annual inflation held steady at 3.4%. Core CPI increased 0.3% month-on-month, above the 0.2% forecast, and annual core inflation eased to 2.4%, matching expectations. Gasoline prices rose 3.9% in August, accounting for more than one-third of the monthly increase in headline inflation [1]. The US Dollar Index (DXY) traded around 99 after briefly climbing to 99.36, with limited buying interest following the data and a pullback in US Treasury yields from multi-year highs [1].
Market expectations for a Federal Reserve rate hike at the September 15-16 meeting strengthened, with the CME FedWatch Tool showing an 88% probability of a 25-basis-point increase, up from 67% earlier in the day. This follows Thursday’s Producer Price Index (PPI) report, which showed annual producer inflation accelerated to 5.4% in August from 4.8% in July [1]. ING’s Francesco Pesole notes that the Dollar is benefiting from rising global bond yields and oil prices, and sees DXY 100.0 as an increasingly realistic destination in the coming weeks. He suggests that only a marginal upside surprise in US CPI may be enough to fully price a September Fed hike, while a softer CPI print could weigh on the dollar but may not push September hike pricing below 50% [3].
On the Euro side, the European Central Bank (ECB) delivered a hawkish 25-basis-point rate hike to 2.50%, with President Christine Lagarde calling the move a “no brainer” and signaling more hikes as inflation is seen above target for an extended period. The ECB revised its baseline inflation projection higher for 2027 and 2028, and real GDP growth projections were revised higher for 2026 and 2027. The ECB cautioned that risks are tilted to the upside for inflation and to the downside for economic growth. The swaps curve implies ECB rates at 3.50% in the next twelve months, and EU–US rate differentials remain broadly supportive for EUR/USD [2].
Despite the ECB’s hawkish stance, the Euro struggled against most major peers, particularly the British Pound, as stronger-than-expected UK economic data supported GBP. The UK economy expanded 0.4% month-on-month in July, beating expectations for no growth. Industrial Production and Manufacturing Production also exceeded forecasts, rising 0.2% and 0.9% month-on-month, respectively. Rising oil and gas prices present a stagflationary backdrop for the energy-dependent Eurozone, and the ECB warned that inflation risks are tilted to the upside and growth risks to the downside. Additional ECB rate hikes remain possible if energy costs stay elevated [4].
Technical analysis for EUR/GBP shows the pair is capped by resistance at 0.8600-0.8610, with a neutral near-term outlook as momentum indicators point to limited bullish bias. Immediate support is seen at the 50-day SMA near 0.8554, and a break below this level would expose the psychological 0.8500 mark [4].
CONCLUSION
The Euro and US Dollar are both influenced by central bank policy expectations, with the ECB’s hawkish stance and the Fed’s rate hike prospects driving currency movements. While the Euro has stabilized against the Dollar, it continues to struggle against the Pound amid strong UK economic data and rising energy prices. Market sentiment remains cautious, with rate hike probabilities and inflation risks shaping the outlook for both currencies.