Euro extends decline under US pressure

The euro fell against a basket of global currencies in European trading on Friday, extending losses against the US dollar for a second consecutive day and moving further away from a two-week high as correction and profit-taking continued.

The decline also reflects pressure from the US side, with the world’s largest currency recovering and long-term US Treasury yields rising ahead of key inflation data in the United States.

The European Central Bank raised interest rates for the second time this year, taking them to their highest level since March 2025, in a move reflecting growing concerns about persistent inflationary pressures.

Media reports said European Central Bank policymakers have begun discussing the possibility of a third interest rate hike at their October meeting.

The Price

• The euro today: The euro fell 0.1% against the dollar to $1.1599, from the day’s opening level of $1.1611, after recording a high of $1.1615.

• The euro ended Thursday down 0.2% against the dollar, its first loss in four days, due to correction and profit-taking after reaching a two-week high of $1.1654 the previous day.

• In addition to profit-taking, the euro came under pressure after strong US economic data increased expectations that the Federal Reserve will raise interest rates in September.

US dollar

The US Dollar Index rose 0.1% on Friday, extending gains for a second consecutive session and reflecting the continued recovery of the US currency from a three-week low against a basket of global currencies.

The yield on the 10-year US Treasury note rose around 0.4% on Friday, extending gains for a fifth consecutive session and reaching a three-year high of 4.979%, boosting the attractiveness of investments in the US dollar.

The yield is moving closer to breaking above the 5% threshold for the first time since October 2023, driven by the current surge in global oil prices, which is expected to increase inflationary pressures on Federal Reserve policymakers and significantly strengthen the likelihood of further US interest rate hikes this year.

US government data released on Thursday showed that annual producer price inflation rose more than expected in August, increasing expectations of a US interest rate hike in September.

Following the data, according to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its September meeting fell from 40% to 28%, while the probability of a 25-basis-point rate hike increased from 60% to 72%.

Investors are now awaiting key US inflation data later today, with the release of the August Consumer Price Index expected to trigger another repricing of those probabilities.

European Central Bank

In line with expectations, the European Central Bank decided on Thursday to raise its key interest rate by 25 basis points to 2.65%, its highest level since March 2025, marking the second European interest rate increase this year.

The ECB’s decision was unanimous and aimed at countering renewed inflationary pressures caused by the energy price shock and disruptions to maritime shipping.

The European Central Bank raised its growth forecasts, signaling that the European economy has shown greater resilience to the energy shock than previously expected. The ECB now expects the economy to grow by 0.9% in 2026, compared with its previous forecast of 0.8%, and by 1.4% in 2027, up from its previous projection of 1.3%.

The ECB has also become increasingly concerned that elevated inflation could persist for longer, with prices expected to remain above its 2% target for an extended period.

Christine Lagarde

European Central Bank President Christine Lagarde warned on Thursday that the conflict in the Middle East continues to generate inflationary pressures and that inflation is likely to remain above target for longer.

She noted that persistently elevated energy prices could cause inflation to spread into other sectors through second-round effects, increasing the risk that price pressures become more persistent.

Lagarde stressed that the Governing Council had not discussed any potential future path for interest rates, reaffirming its commitment to a meeting-by-meeting, data-dependent approach without pre-committing to a particular course.

European interest rates

• ECB sources said further monetary tightening is likely, with another interest rate hike potentially being discussed as early as October.

• Money markets currently price the probability of a 25-basis-point ECB rate hike in October at below 50%.

• Investors are awaiting further eurozone economic data on growth, inflation, unemployment and wages to reassess those expectations.

Euro outlook

We expect that if US inflation data are more hawkish than markets currently anticipate, expectations for the Federal Reserve to raise interest rates next week will increase, putting further downward pressure on the euro against the US dollar.