The euro faces the risk of further weakness against the US dollar after hitting an 18-month low of US$1.1065. In trading on Thursday (Nov 12), the EUR/USD pair hovered around US$1.1092, with market attention shifting toward the psychological level of US$1.10.
Pressure on the euro stems from growing expectations of a Federal Reserve interest rate hike, following US inflation data that came in higher than anticipated. Hawkish remarks from Fed Governor Christopher Waller have further reinforced the view that the US central bank still has room to tighten monetary policy.
The market currently estimates a roughly 90% probability of a 25-basis-point rate hike in December, while the chance of a larger 50-basis-point increase stands at around 9%. This suggests that for the euro to weaken past the US$1.10 mark, there would need to be a shift toward more aggressive expectations regarding Fed policy.
According to ING, the euro could potentially retest the US$1.10 level in the coming days. However, a decisive drop below that threshold is likely only if the market begins to seriously price in a 50-basis-point rate hike by the Fed in December.