EUR/USD Slumps to 2-Month Low on 150bp Fed-ECB Gap

The EUR/USD currency pair fell to its lowest level since late July on Friday, reaching 1.1464 as the European Central Bank's (ECB) deposit rate remains 150 basis points below the Federal Reserve's (Fed) target range of 3.75%-4.00%. The ECB raised its deposit rate to 2.50% on September 10, while the Fed increased its target range by 25 basis points on September 16.

The price action this week reflects the market's expectation that the Fed will continue to hike rates more aggressively than the ECB. EUR/USD traded at 1.1630 on September 10, but dropped below 1.1600 after the ECB announcement. The pair held near 1.1550 ahead of the Fed meeting, then fell 0.585% on September 16 as the Fed raised rates and signaled further increases to come.

Markets are pricing in a higher probability of additional rate hikes from the Fed, with futures implying a 53.1% chance of a hike at the October 27-28 meeting and three more quarter-point increases by April 2027. This would take the range to 4.50%-4.75%, the highest U.S. policy rate since 2007.