DXY Plunge to Near 99 Ignites EUR/USD Rally Amid ECB Rate Hike Bets

The EUR/USD pair traded at $1.1609 on Wednesday, reaching its highest level since June 17 after the DXY fell to near 99.00.

The U.S. Dollar Index has been declining steadily, losing 0.65% on the day and touching its lowest level since June 1.

This is significant because the dollar's slide has compressed the carry advantage that has supported the dollar all year, and with the euro leg simultaneously repricing higher on ECB expectations, both sides of the differential moved in the euro's favor within the same 24-hour window.

The ECB hike to 2.50% on September 9 is currently priced at a 90% to 94% probability, while the Federal Reserve holds at 3.50%-3.75% on September 16 with a 33.1% probability of a 25 basis point increase.

The current setup is unusual because the ECB is tightening, which has historically been a headwind for the euro. However, the region's economy expanded 0.4% in the second quarter, while U.S. retail sales contracted 0.6% in July and payrolls showed unexpected job losses.

Bank targets sit well above spot, with Goldman Sachs and Deutsche Bank at 1.25, MUFG and Scotiabank at 1.24, JPMorgan and ING at 1.22, UBS at 1.20, and Bank of America at 1.15.