FX.co ★ Euro Slips as Investors Digest Inflation Data

The euro slipped slightly below $1.16 as investors digested the latest Eurozone inflation figures and their implications for the ECB’s interest rate path. Annual inflation accelerated to 3.3% in August, its highest level since September 2023 and well above the ECB’s 2% target, driven largely by a sharp rise in energy prices amid ongoing conflict in the Middle East.

The data strengthened expectations that the ECB could raise rates as early as this month, even as services and core inflation showed signs of easing. Money markets now see the deposit rate at around 2.70% by December, indicating roughly an 80% chance of a second increase following an anticipated September hike.

ECB policymaker Olli Rehn cautioned that a prolonged conflict could keep price pressures elevated, while Martin Kocher noted that rising inflation risks may necessitate a rapid rate hike if confirmed in the ECB’s forthcoming projections. At the same time, the dollar stayed firm after Fed Chair Kevin Warsh adopted a hawkish stance, with markets assigning about a 66% probability to a Federal Reserve rate hike in September.