Euro Tumbles to One-Month Low as Fed Rate Hike Odds Reach 100%

Key Takeaways

• EUR/USD fell toward 1.1550 and extended its decline for a fourth consecutive session as the US dollar strengthened ahead of the Federal Reserve’s September policy decision.
• Federal funds futures fully priced a 25-basis-point rate increase at Monday’s close, which would lift the target range to 3.75%–4.00%.
• The currency pair broke below important moving averages, placing the 1.1500 region in focus, although a fully priced rate increase raises the risk of volatility in both directions after the Fed announcement.

EUR/USD Falls to a One-Month Low

The euro remained under pressure against the US dollar on Tuesday, with EUR/USD trading below the middle of the 1.1500–1.1600 range and hovering close to its lowest level in approximately one month.

The pair closed Monday near 1.1550, down roughly 0.42% for the session, after reversing from last week’s high near 1.1650. The move pushed EUR/USD below its 50-day and 200-day exponential moving averages for the first time since late July, reinforcing the deterioration in short-term price momentum.

The US dollar also gained broadly against other major currencies. Higher Treasury yields, expectations of tighter Federal Reserve policy and continued geopolitical uncertainty increased demand for dollar-denominated assets.

The decline is particularly notable because the European Central Bank raised interest rates only days earlier. The euro’s failure to benefit from that decision suggests that traders are currently placing greater weight on the Federal Reserve outlook, rising energy costs and the potential effect of expensive oil on the eurozone economy.

Fed Rate Hike Is Fully Priced In

Federal funds futures ended Monday pricing a 100% probability of a 25-basis-point increase at the Federal Reserve’s September meeting. Such a move would raise the federal funds target range from 3.50%–3.75% to 3.75%–4.00%.

The Federal Open Market Committee is holding its two-day meeting on September 15–16. The policy announcement is scheduled for Wednesday and will be accompanied by updated economic projections.

If delivered, the move would represent the Fed’s first rate increase since 2023. Expectations have shifted sharply as higher energy prices and renewed inflation pressures challenge earlier assumptions that US monetary policy could remain unchanged.

The immediate rate decision may not be the only factor driving EUR/USD. Because a quarter-point increase is already heavily reflected in market pricing, traders are likely to focus on the Fed’s projections, the voting pattern and the guidance surrounding possible additional increases.

A signal that interest rates may remain higher for longer could support US Treasury yields and extend the dollar’s advance. A more cautious message, however, could trigger profit-taking in the dollar even if the Fed raises rates as expected.

Higher US Inflation Strengthens the Dollar

The latest US inflation report strengthened the case for tighter monetary policy. Headline consumer prices rose 0.4% month on month in August, accelerating from a 0.1% increase in July. Annual inflation remained at 3.4%.

Core CPI, which excludes food and energy, rose 0.3% during the month and 2.4% from a year earlier. Although the annual core rate eased slightly, the stronger monthly reading indicated that underlying inflation pressures had not disappeared.

Energy was a major contributor. The energy index increased 2.1% in August, while gasoline prices rose 3.9% and accounted for more than one-third of the monthly headline CPI increase.

Rising inflation expectations have also pushed US bond yields higher. The benchmark 10-year Treasury yield has approached the psychologically important 5% level, increasing the relative appeal of dollar assets and adding pressure on currencies with lower or less certain interest-rate returns.

Oil Prices Create an Additional Headwind for the Euro

Elevated crude oil prices are adding another layer of pressure to EUR/USD. Brent crude has traded above $100 per barrel in recent sessions as conflict in the Middle East raises concerns about global energy supplies.

Europe imports a large proportion of the oil it consumes, and international crude transactions are generally settled in US dollars. Higher oil prices can therefore increase demand for dollars while raising energy costs for eurozone businesses and households.

The consequences for the euro are mixed. More expensive energy may force the ECB to keep interest rates higher to control inflation, which would normally support the currency. At the same time, higher import costs can weaken economic growth, reduce household purchasing power and place pressure on the region’s trade balance.

For now, the growth and import-cost concerns appear to be outweighing the potential support from higher European interest rates.

What Could Move EUR/USD After the Fed Decision?

A 25-basis-point increase accompanied by higher rate projections could strengthen the dollar and push EUR/USD below 1.1500. The magnitude of the move may depend on whether policymakers signal that further increases are likely before the end of the year.

If the Fed raises rates but adopts a cautious outlook, the dollar could give back part of its recent advance because the expected increase is already largely priced in. EUR/USD could then attempt to recover toward 1.1600.

An unexpected decision to leave rates unchanged would probably generate the largest immediate reaction. It could weaken the dollar and lift EUR/USD, although traders would also need to assess whether the decision reflects concerns about US economic growth or financial stability.

Until the announcement, EUR/USD may remain sensitive to changes in Treasury yields, oil prices and broader risk sentiment. The Fed’s updated projections and forward guidance are likely to determine whether the break below the pair’s long-term moving averages develops into a deeper decline or proves temporary.