The euro fell to its lowest against the dollar in the last three months amid expectations that the US Federal Reserve may adopt a tighter stance to combat inflation, and due to rising energy prices in Europe.
The effect of geopolitical risks in the Middle East on energy supply continues to complicate efforts to combat inflation.
Central banks around the world may have to accelerate their monetary tightening processes in response to rising inflation risks, driven by mounting oil prices.
Persistent inflation concerns fuel market estimates that the Fed may hike rates again by the end of the year, while the bank may continue its hawkish stance into next year.
Despite a 73% probability that the Fed will hike rates by 25 basis points in October, it remains uncertain whether it will maintain rates or raise them in December.
The US employment and nonfarm payrolls data to be released this week will further influence the Fed’s decisions.
Growing expectations that the Fed will remain tighter to control inflation drove up the US dollar’s value against other currencies.
The euro/US dollar exchange rate hit 1.1332 Tuesday, falling 0.3%, marking its lowest since June 24, when it was 1.1324.
Piotr Matys, senior foreign exchange analyst at In Touch Capital Markets, told Anadolu that the US and European bond markets diverged due to differences in country-specific developments and volatility in oil prices, reflecting in the exchange rate.
“With yields spread widening in favor of the dollar, the EUR/USD continues to lean lower despite momentum indicators a bit stretched,” he said. “The euro could be particularly sensitive to a fresh set of US data that will be released throughout this week, culminating with non-farm payrolls on Friday.”
He added that if the US data weakens hawkish expectations, the exchange rate could see a corrective rebound or trade sideways.
Kit Juckes, head of foreign exchange strategy at Societe Generale, told Anadolu that the exchange rate dropped below the low it reached in late June.
“That it held up for so long is testament to the success of President Trump’s verbal campaign to hold down the dollar, but elevated oil prices, a strong economy, high bond yields, and Federal Reserve policy tightening are too powerful a force to be talked away,” he said. “How much further we go in the short term, may depend on this week’s US inflation, employment, and ISM (Institute of Supply Management) data, but as long as energy prices are this elevated, a slow grind lower for EUR/USD seems the path of least resistance.”
Juckes added that a gradual decline in the euro/dollar exchange rate is likely to continue so long as energy prices remain this high.