Fed hawks underpin Dollar as Euro languishes near May 2025 lows

• With the US Dollar retaining its strength, EUR/USD remains close to levels last seen in May 2025.
• US jobless claims exceeded forecasts, putting pressure on the Greenback, although hawkish Fed expectations cushion its decline.
• Persistent worries over Eurozone growth leave ECB rate hike expectations providing little support.

At around 1.1087 at the time of writing, EUR/USD is little changed during Thursday’s American session, having recovered from an intraday low of 1.1066, its lowest since May 2025. The recovery comes as the US Dollar (USD) surrenders part of its gains after setting a fresh year-to-date high.

US Initial Jobless Claims increased from 191K in the previous week to 200K, exceeding the forecast of 195K and taking some momentum out of the Greenback. The four-week average was unchanged at 195.25K. After touching 103.08 earlier in the day, the US Dollar Index (DXY) is trading near 102.95.

Increasing calls by Federal Reserve (Fed) officials for additional rate rises to contain inflation continue to underpin the Greenback. Speaking on Thursday, Cleveland Fed President Beth Hammack said policy needs to move into restrictive territory, noting that higher energy costs are feeding through to other prices. While smaller adjustments cause less disruption to the economy, she said a larger increase could be necessary if the Fed falls behind.

Support for further tightening also came earlier this week from Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson. Ahead of Tuesday’s inflation report, Fed Governor Christopher Waller said a monthly core inflation figure of around 0.3% could bring a half-point December increase into consideration.

With core inflation registering 0.3%, traders have now fully priced in a rate rise in December. The preferred outcome remains a 25-basis-point (bps) increase, although a small probability is attached to a larger 50 bps move. Expectations also point to further Fed rate rises into 2027.

Following US President Donald Trump’s statement on Truth Social that the US does not need a deal with Iran, inflation risks stemming from energy remain under scrutiny. Friday’s US Producer Price Index (PPI) is the next inflation release on traders’ radar.

Euro outlook weakens as ECB caution diverges from Fed tightening

All 71 economists in a Reuters poll released on Thursday forecast a 25 bps increase in the European Central Bank’s (ECB) deposit rate to 2.75% in December. While 46 expect that to conclude the tightening cycle, the other 25 anticipate a further rise, most likely in the first quarter of 2027.

According to Rabobank strategists, “the Fed is not the only G10 central bank widely expected to hike rates in December,” and the ECB is “among those banks also likely to tighten policy.” Their caution is that “the ECB, however, could prove to be reluctant to hike rates beyond December,” citing indications from “the last ECB press conference” that “suggested that the GC were becoming increasingly concerned about the growth outlook.”

Rabobank’s house view holds that “market pricing for 2027 ECB rate rises remains too aggressive,” while the strategists also warn that “another factor that could weigh on the EUR in the coming months are uncertainties about what a far-right president in France could mean for EU cooperation going forward.”