Euro struggles awaiting US rate decision

As the Asian session begins, the Euro (EUR) extends its losses by a minuscule 0.01% against the US Dollar (USD) as market participants prepare for the US Federal Reserve’s decision. The Greenback stages a comeback propelled by a jump in US Treasury bond yields. The EUR/USD is trading at 1.0677, following Tuesday’s losses of 0.12%.

Euro faces headwinds as the US Dollar gains strength on soaring Treasury yields, with all eyes on the upcoming Federal Reserve decision

US equities ended the day with losses. The US 10-year Treasury bond yield skyrocketed to a 16-year high at 4.367%, a headwind for the EUR/USD, which remains close to the 1.0700 figure, but it’s set to continue to print losses amidst speculations the Fed would deliver a hawkish hold.

Given that recent data in the United States (US) showed the robustness of the economy, with a hot jobs market, improvement in business activity, and consumer spending expanding – though at a lower rhythm – are reasons for the Fed Chair Powell and Co to keep “at it,” and hold rates higher for longer. Furthermore, last week’s Consumer and Producer Price Index (CPI and PPI) printed higher readings, justifying the need for higher rates.

Besides delivering its monetary policy decision, policymakers would update their economic projections regarding growth, unemployment rate, inflation, and the Federal Funds Rates (FFR). In June, Fed officials expected the FFR to peak at around 5.60%. Despite that, money market futures are pricing the FFR to peak at around 5.46%.

Data-wise, a scarce US economic docket revealed housing data, which came mixed. US Building Permits improved compared to July’s 0.1% expansion grew by 6.9%, while Housing Starts plunged -11.3%, beneath the -2.5% contraction estimated.

Across the pond, the Eurozone (EU) economic docket revealed inflation data. The Harmonised Index of Consumer Prices (HICP) for August came at 5.2% YoY, below 5.3% estimates, while core HICP stood at 5.3% unchanged, aligned with estimates.

Recently, some European Central Bank (ECB) officials signaled the ECB would not continue to tighten monetary conditions. Nevertheless, an ongoing economic deceleration in the bloc and a deposit rate at its highest level since the Euro’s inception at 4.00% could bring inflation towards its target.

A poll by Reuters showed that 70 economists commented the ECB is done hiking rates and that the deposit rate would end the year at its current 4.00% level. Although the ECB’s President Christine Lagarde refrained from saying that rates have peaked, money market futures see a 25% chance for additional hiking towards the end of the year.

Given the backdrop, if the Fed delivers a hawkish hold, expect further EUR/USD’s downside; otherwise, the single currency could rally and reclaim the 1.0700 level, with buyers eyeing 1.0800.