Euro hovers near two-month low as hawkish Fed outlook weighs

• EUR/USD hovers near a two-month low as hawkish Fed expectations favour the US Dollar.
• Markets raise bets on an October Fed rate hike after resilient US economic data.
• The Euro struggles despite upbeat German Ifo figures and expectations of more ECB tightening.

EUR/USD hovers near a two-month low on Thursday as expectations of another Federal Reserve (Fed) interest-rate hike keep the US Dollar (USD) firmly supported. At the time of writing, the pair trades around 1.1372, remaining on the back foot for a fourth consecutive day.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.27 after touching an intraday high of 101.35, its highest level since July 29.

Markets see a growing chance that the Fed will raise interest rates again in October after delivering a 25-basis-point (bps) increase last week. Wednesday’s strong US PMI data and hawkish remarks from Fed officials have strengthened these expectations, with the CME FedWatch Tool placing the probability of a rate hike at around 65%, up from 55% a week ago.

US labour-market figures released on Thursday showed that Initial Jobless Claims edged higher to 197K from 196K previously but came in below market expectations of 201K.

Cleveland Fed President Beth Hammack reinforced the focus on inflation, saying, “Price stability is the responsibility of central banks.” She noted that “supply shocks are a notable challenge for Fed policy right now” and warned that “the longer inflation remains high, the harder it is to bring it back to target.”

The hawkish repricing, combined with higher inflation expectations linked to elevated Oil prices, has pushed US Treasury yields to multi-year highs. The benchmark 10-year yield trades around 5.10%, after hitting 5.15%, its highest level since 2007. Elevated yields support the US Dollar by increasing the appeal of US-denominated assets.

Across the Atlantic, stronger-than-expected German Ifo data released earlier on Thursday lends some support to the Euro (EUR), but broad US Dollar strength keeps the currency under pressure even as markets expect additional European Central Bank (ECB) rate hikes.

ECB Policymaker Dimitar Radev said the central bank should give its previous decisions time to work and stressed that the latest rate increase “doesn’t put us on a predetermined path.” He added that policymakers are “not seeing broad-based second-round effects,” although inflation risks are tilted to the upside and growth risks to the downside.