Euro extends losses to two-month low ahead of key European sector data

The euro fell against a basket of global currencies in European trading on Wednesday, extending its losses against the US dollar for a third consecutive day and hitting a two-month low, amid negative pressures, particularly those related to interest rate differentials between Europe and the United States.

To reassess expectations for European interest rates, investors are awaiting a series of key data releases on Europe’s major sectors for September, which will provide important clues about the pace of economic growth during the third quarter of this year.

The Price

• The euro exchange rate today: The euro fell around 0.2% against the dollar to $1.1425, its lowest level since July 29, from the day’s opening level of $1.1446, after recording a high of $1.1450.

• The euro ended Tuesday down 0.15% against the dollar, its second consecutive daily loss.

US dollar

The US Dollar Index rose 0.2% on Wednesday, extending gains for a third consecutive session and hitting a two-week high of 100.73 points, reflecting continued strength in the US currency against a basket of major and secondary currencies.

The dollar’s advance has been supported by demand for the currency as the most attractive investment in the foreign exchange market, particularly amid the Federal Reserve’s hawkish stance, which supports the prospect of an additional US interest rate hike this year.

St. Louis Federal Reserve President Alberto Musalem and Chicago Federal Reserve President Austan Goolsbee both pointed to the need for further interest rate hikes to curb inflation driven by strong demand and higher energy prices.

According to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its October meeting currently stands at 45%, while the probability of a 25-basis-point rate hike stands at 55%.

European interest rates

• European Central Bank sources said further monetary policy 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 interest rate hike in October at around 50%.

Interest rate differentials

After the Federal Reserve raised US interest rates by 25 basis points last week to 4%, the interest rate differential between Europe and the United States widened to 135 basis points in favor of US rates, strengthening the investment appeal of the US dollar against the euro.

Key sectors

To reassess expectations for European interest rates, investors are awaiting a series of data releases on the major sectors of the European economy for September, which will provide important clues about the pace of economic growth during the third quarter of this year.

Euro outlook

We expect that if Europe’s key sector data come in weaker than market expectations, the probability of an ECB interest rate hike in October will decline, adding further negative pressure on the euro against a basket of global currencies.