Euro Hits 16-Month Low as Interest Rate Hike Expectations Decline

The euro has been experiencing significant losses against the US dollar, extending its decline for a fourth consecutive session. As of Thursday, it fell to $1.1315, approaching a fresh 16-month low. This downturn is attributed to decreased expectations of a European interest rate hike in October, following European Central Bank President Christine Lagarde's testimony before the European Parliament.

Lagarde stated that the energy shock is raising inflation expectations, but the ECB sees no need to overreact, suggesting a gradual monetary policy response remains appropriate. As a result, money market pricing for a 25-basis-point ECB interest rate hike in October declined from 50% to 40%. Investors are awaiting key European inflation data for September on Friday to reassess those expectations.

The widening interest rate differential between Europe and the US, now at 135 basis points in favor of US rates, has increased the relative attractiveness of the US dollar over the euro. The US Dollar Index rose 0.2% on Thursday, hitting a four-month high of 101.65, while the 10-year US Treasury yield reached a 24-year high of 5.310%, providing further support for the US currency.

With hawkish comments from Federal Reserve officials continuing to reinforce expectations that US interest rates will be raised again this year, the euro is expected to remain under negative pressure against the US dollar and potentially lose its position above $1.13 for the first time since May 2025.