Euro heads for biggest monthly loss of 2026: What are the reasons?

The euro rose against a basket of global currencies in European trading on Wednesday, attempting to recover from a 16-month low against the US dollar as bargain buying picked up, while the US currency’s rally stalled after expectations for a Federal Reserve interest rate hike in October declined.

Despite Wednesday’s recovery, the single European currency is heading for its biggest monthly loss of the year amid concerns over widening interest rate differentials between Europe and the United States.

The Price

• EUR/USD rose more than 0.1% to $1.1353, from the day’s opening level of $1.1341, after hitting a low of $1.1329.

• The euro ended Tuesday down 0.25% against the dollar, its second consecutive daily loss, hitting a 16-month low of $1.1312 as expectations for a third European interest rate hike this year declined.

US dollar

The US Dollar Index fell around 0.15% on Wednesday, retreating from a two-month high and heading for its first loss in three sessions, reflecting a pause in the US currency’s rally against a basket of major and secondary currencies.

In addition to profit-taking, the US dollar is currently under pressure following weak US consumer confidence and job openings data, which reduced expectations that the Federal Reserve will raise interest rates in October.

Following those figures, the CME FedWatch Tool showed that the probability of the Federal Reserve leaving interest rates unchanged in October rose from 30% to 53%, while the probability of a 25-basis-point rate hike fell from 70% to 47%.

Investors are awaiting several key US economic releases later today to reassess those expectations, including private-sector employment data for September, second-quarter economic growth figures and the Personal Consumption Expenditures report for August.

European interest rates

• European Central Bank President Christine Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs in Brussels on Monday that the energy shock was raising inflation expectations, although there were no signs yet of a material impact.

• Lagarde added that higher energy prices would push inflation higher in 2027 and 2028 compared with previous forecasts, but stressed that there was currently no evidence of higher energy prices feeding through into wages.

• Lagarde said the central bank currently sees no need to overreact to the inflation shock. While the scale of the shock means it cannot be ignored, she said a gradual monetary policy response remains appropriate for now.

• Following those comments, money-market pricing for a 25-basis-point interest rate hike by the European Central Bank in October fell from 50% to 40%.

• Investors are awaiting key European inflation data for September on Friday to reassess those expectations.

Monthly trading

The euro is down around 2.25% against the US dollar so far in September, which officially ends at today’s settlement, putting the currency on track for its first monthly loss in three months and its biggest monthly decline since July 2025.

Interest rate differentials

After the Federal Reserve raised US interest rates by 25 basis points this month to 4%, the interest rate differential between Europe and the United States widened to 135 basis points in favor of US rates, increasing the relative attractiveness of the US dollar over the euro.