Euro Slips as Hawkish Fed Tone Boosts Dollar

The euro has weakened to around $1.16, its lowest level since August 19, due to investors flocking to the US dollar after Federal Reserve Chair Kevin Warsh's hawkish remarks.

Warsh reiterated that the Fed's 2% inflation target is 'firm and fixed,' while stating financial conditions are not currently restrictive and interest rates remain the Fed's primary tool.

This hawkish tone has boosted expectations of further tightening from the European Central Bank (ECB), despite European data pointing to renewed inflationary pressures in France and Spain. EU-harmonized inflation rose to 2.7% in France and 4.5% in Spain, its highest since 2023.

Markets now see the ECB deposit rate rising to 2.80% by March next year from 2.25% currently, with a roughly 60% chance of a hike to 3%. A possible September hike is also on the table, although policymakers remain reluctant to signal further tightening.