Euro sharpens decline to six-month trough amid concerns about rate gap

Euro fell in European trade on Tuesday on track for the sixth straight loss against dollar, plumbing a six-month trough amid concerns of a widening interest rate gap in favor of the US.

The ECB announced that interest rates have reached restrictive levels, while the Federal Reserve hinted at another interest rate hike this year.

EUR/USD fell 0.2% today to 1.0570, the lowest since March, with a session-high at 1.0596, after losing 0.5% on Monday, the fifth loss in a row after ECB President Christine Lagarde's testimony ahead of Parliament, while US treasury yields spiked. 

Lagarde said that recent economic indicators show weakness in the euro zone in the economy during the third quarter of the year. 

Lagarde said that inflation in the euro zone is expected to decline further but will likely remain high for a long time. 

Lagarde asserted that current interest rates will help achieve inflation targets in the medium term at 2%, with the ECB continuing to rely on new data to determine the path ahead. 

Interest Rate Gap

The current interest gap is now holding at 100 basis points between the US and Europe, the lowest since May 2022, however it could rise once more to 125 basis points. 

Most analysts expect the European Central Bank to hold interest rates unchanged this year.

However, the Fed is expected to raise interest rates by 25 basis points in November or December to hammer inflation home. 

The Dollar

The dollar index rose 0.25% on Tuesday, the third profit in a row, hitting a ten-month high at 106.20 against a basket of major rivals.

US 10-year treasury yields rose 0.6% today to 16-year peak at 4.564%.

Such gains came after the Federal Reserve issues official expectations that clearly pave the way for another interest rate hike this year.

The Fed also expects two interest rate cuts in 2024, much lower than previously expected.