The Euro (EUR) has retreated below 1.1600 against the US Dollar (USD), trading near 1.1590, as the earlier boost from the European Central Bank's (ECB) hawkish rate hike fades and investors focus on the upcoming US Consumer Price Index (CPI) release [1]. The EUR/USD pair is at weekly lows, down from highs of 1.1650 earlier in the week, with market participants awaiting the CPI data, which is seen as the final key input for the Federal Reserve's (Fed) monetary policy decision next week [1].
Futures markets are currently pricing in a 67% to 68% chance of a 25 basis point Fed rate hike at the September 15-16 meeting, up from 50% the previous week, according to CME’s FedWatch Tool and Fed funds futures [1][2]. This shift in expectations follows the US Producer Price Index (PPI) for August, which showed factory-gate inflation accelerating to 5.4% year-on-year from 4.8% in July, and core PPI rising to 4.6% from 4.3% [1]. The PPI was broadly in line with expectations, but some components that feed into the Personal Consumption Expenditures (PCE) index ran hot, contributing to a modestly hawkish Fed repricing and supporting the USD [2].
Analysts highlight that the August CPI report will be decisive for the Fed's upcoming decision. According to Brown Brothers Harriman’s Elias Haddad, a hot CPI print would likely seal a September rate hike and support the USD, while a cooler reading would favor a hold and could trigger a dovish repricing, making the USD vulnerable to downside [2]. Commerzbank analysts note that the market is anticipating several rate rises totaling 80 basis points by mid-next year, but caution that this may be optimistic, especially if the core inflation rate remains moderate as forecasted (0.2% month-on-month) [1]. They also point out uncertainty regarding the new Fed Chair’s willingness to raise rates, suggesting that even a strong CPI print may not guarantee further tightening [1].
Despite the potential for a September hike, Haddad doubts the USD will make new cyclical highs, as tightening by other major central banks, such as the ECB, limits policy divergence [2]. The ECB recently raised its Deposit Facility rate by 25 basis points to 2.5% for the second consecutive time, with President Christine Lagarde signaling that inflation will remain above the 2% target until "well into 2027," leaving the door open for further tightening [1]. Risks around the CPI print are described as finely balanced, with the August ISM Prices Paid index suggesting that upside inflation risks persist, setting the stage for potentially volatile market reactions [2].
CONCLUSION
Markets are highly focused on the upcoming US CPI release, which is expected to be the decisive factor for the Fed's rate decision next week. While a hot CPI would likely cement a rate hike and support the USD, analysts caution that further USD gains may be limited due to tightening by other central banks and ongoing uncertainty about the Fed's future path. Volatility is expected to remain elevated as traders await the inflation data.