FX.co ★ Euro Nears July Low as Markets Scale Back ECB Rate-Hike Bets

The euro slipped to just below $1.15, hovering near its weakest level since late July, and was down nearly 1% against the US dollar as traders pared back expectations for additional ECB interest rate hikes. This retreat in rate bets came even as the Federal Reserve adopted a more hawkish stance, raising rates this week and indicating room for further tightening, following a similar move by the ECB last week.

Several analysts argued that markets had overestimated the likelihood of further ECB hikes, pointing out that rising energy prices could dampen economic growth and, in turn, reduce inflationary pressures. Money markets now see the ECB deposit rate at just under 2.9% by December, implying roughly a 50% probability of a second rate increase this year. By November 2027, rates are projected at 3.39%.

Elsewhere, the Bank of England left interest rates unchanged on Thursday but cautioned that a protracted conflict in the Middle East could necessitate tighter policy. Meanwhile, the Bank of Japan raised rates to their highest level in 31 years and signaled that further tightening is likely.