EUR/USD Retreats Amid Fading Fed Rate Hike Expectations

The EUR/USD exchange rate retreated from its two-month high of 1.1614 on August 18, hovering around 1.1570 due to a shift in Fed rate hike expectations. The euro has gained about 1.4% over the past month, with the ECB's reference rate at 1.1593 dollars per euro on August 17.

A weak U.S. July labor market report showed nonfarm payrolls fell by 23,000, while retail sales declined 0.6% in July and CPI rose just 0.1%. This led to a reduction in expectations for further Fed tightening, with the probability of a rate hike in September falling to around 30-35%.

European data, on the other hand, show moderate growth and renewed price pressures, making further ECB easing increasingly unlikely. The deposit rate remains at 2.25%, while markets now price in more than an 80% probability of a 25-basis-point hike at the September 10 meeting.