Euro Drops Below 1.1600 on Fed Hike Expectations

The euro slipped to 1.1585 against the US dollar in early Asian trading on Monday. This decline reflects a sharp rise in market expectations for a Federal Reserve interest rate increase. Traders now assign a 91% probability to a quarter-point hike at the September meeting. This figure marks a significant jump from the 72% likelihood priced in before recent US inflation data.

The shift follows the release of August Consumer Price Index figures. US inflation accelerated to 0.4% month-over-month, with the annual rate holding at 3.4%. Core inflation, which excludes food and energy, rose by 0.3% against a forecast of 0.2%. These numbers reinforced the view that the Fed cannot justify holding rates steady. Chris Zaccarelli of Northlight Asset Management noted the difficulty of the Fed avoiding a hike.

ECB hawkish stance drives tightening

The European Central Bank raised its deposit facility rate to 2.50% last week. This was the second hike of the year, following a move in June. Analysts at Barclays expect further increases due to the hawkish tone of the decision. Scotiabank noted that ECB President Christine Lagarde’s comments leaned toward near-term hikes. Markets are now pricing in nearly 40 basis points of additional tightening by year-end.

The ECB’s fresh inflation forecast indicates prices will remain above target through the end of the projection horizon. This outlook reinforces the bank’s focus on inflation risks. The divergence in policy trajectories between the ECB and the Fed is pressuring the euro. The currency faces headwinds as US rates are expected to rise faster than European rates.

Technical levels cap upside movement

EUR/USD currently sits above the 100-day simple moving average at 1.1555. This level acts as immediate support alongside the lower Bollinger Band at 1.1560. The Relative Strength Index stands at 48.8, indicating neutral momentum. A daily close below this support cluster would expose the pair to deeper losses. Holding above it keeps the door open for a rebound.

Initial resistance lies near the Bollinger middle band at 1.1628. Selling interest may intensify if price reaches the upper band around 1.1695. The pair is consolidating between these nearby support and resistance levels. The technical setup suggests a broadly sideways bias in the near term. Traders will watch for a break either way to establish a new directional trend.

Market pricing reflects policy divergence

The CME FedWatch tool shows a 91% probability of a Fed hike. This is the primary driver of the euro's recent weakness. The market is reacting to hotter US inflation reports. The ECB’s hawkish stance supports the euro but not enough to offset Fed expectations. The net effect is a softening of the single currency against the dollar. This dynamic is likely to persist until the Fed decision on Wednesday.

GN markets/policy (en-US) highlights the tension between the two central banks. The Fed is positioned to tighten more aggressively than the ECB in the immediate term. This divergence puts downward pressure on EUR/USD. Investors are adjusting their positions to reflect this changing interest rate outlook. The coming week will be critical for confirming these market expectations.