The EUR/USD currency pair traded in negative territory near 1.1660 during the early Asian session on Friday, as the US Dollar strengthened against the Euro. This move was driven by hotter-than-expected US inflation data, which has reinforced expectations that the US Federal Reserve may keep interest rates higher for longer or potentially hike them further. Specifically, US Producer Price Index (PPI) inflation accelerated to its fastest pace since 2022 in April, while the Consumer Price Index (CPI) saw its largest increase since 2023. These data points have supported the Greenback and acted as a headwind for the Euro [1].
Market expectations for a Fed rate hike have increased notably. According to the CME FedWatch tool, there is now nearly a 36.9% chance that the US central bank will raise interest rates by at least 25 basis points at the December meeting, up from 22.5% just a week ago [1]. This shift in rate hike expectations has contributed to the Euro's weakness against the Dollar.
Despite the negative sentiment for the Euro, there are some positive geopolitical developments that could potentially support riskier assets like the shared currency. A meeting between US President Donald Trump and Chinese President Xi Jinping in Beijing resulted in Trump expressing hope for a stronger US-China relationship. Xi pledged not to provide military equipment to Iran and expressed a desire to see the critical Strait of Hormuz reopened, which could ease some geopolitical tensions [1].
Overall, the market reaction has been negative for the Euro, with the focus remaining on US inflation and Fed policy expectations. The possibility of improved US-China relations provides a potential, though currently secondary, source of support for the Euro [1].
CONCLUSION
The Euro has weakened significantly against the US Dollar, driven by strong US inflation data and rising expectations of a Fed rate hike. While geopolitical developments between the US and China offer some hope for risk assets, the dominant market narrative remains centered on US monetary policy tightening.