The Euro (EUR) declined against the US Dollar (USD), with the EUR/USD pair falling to around 1.1335 during early Asian trading hours on Wednesday, following dovish comments from European Central Bank (ECB) President Christine Lagarde [1]. Lagarde stated that rising bond yields are likely to curb economic expansion and limit the transmission of elevated energy costs to inflation, emphasizing that the ECB should adopt a 'measured response as appropriate to keep inflation in check,' noting that second-round effects are so far absent [1].
As a result of Lagarde's remarks, traders reduced their expectations for further monetary tightening by the ECB, with the probability of an October rate hike now seen at less than 40%, according to Bloomberg [1]. ING FX Strategist Francesco Pesole commented, 'Her remarks confirm our suspicion that if one central bank hikes in October, it will be the Fed, and not the ECB' [1]. ING analysts also noted that the Euro 'held up relatively well yesterday considering the slew of dovish-leaning comments by ECB President Lagarde,' but highlighted that rate differentials have moved further in favor of the US, with the SOFR-ESTR 2-year swap spread widening to beyond 155 basis points, close to the 163bp maximum reached in early July [1].
Across the Atlantic, expectations for additional Federal Reserve (Fed) rate hikes are supporting the US Dollar. Markets are now pricing in nearly a 68% probability of a Fed rate hike in October and a 95% chance of an increase in December, according to the CME's FedWatch Tool [1]. Traders are also closely watching the upcoming US Nonfarm Payrolls (NFP) data for September, with economists expecting an increase of 90,000 jobs and the unemployment rate projected to remain unchanged at 4.1% [1].
Technical analysis indicates that EUR/USD retains a bearish near-term bias, as the spot rate remains below the 100-day simple moving average (SMA) and the Bollinger Bands 20-period middle SMA [1]. ING's macro team, however, believes that both the Fed and ECB may wait until December to hike rates, maintaining a baseline view for a higher EUR/USD by year-end [1].
CONCLUSION
The Euro's decline below 1.1350 reflects market reaction to ECB President Lagarde's dovish comments and shifting rate hike expectations. With traders now favoring the Fed over the ECB for an October hike and technical indicators pointing to further downside, the focus turns to upcoming US jobs data and central bank decisions later in the year.