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Hotter underlying US price growth has pushed the single currency to a fresh 17-month low, and strategists see the dollar's rate support strengthening.
The Euro to Dollar exchange rate fell to a fresh 17-month low after US core inflation beat expectations, reviving bets on another Federal Reserve rate hike this month.
Core consumer prices, which strip out food and energy, rose 0.3% in September against a consensus of 0.2%, lifting the annual core rate to 2.6%.
Headline inflation rose 0.6% on the month, in line with forecasts, taking the annual rate to 3.7% as gasoline prices climbed.
Hotter core inflation matters more for the Fed than the energy-driven headline, because it shows price pressures spreading into the wider economy; a Fed that hikes again widens the US interest rate advantage and pulls capital towards the dollar.
"Underlying consumer prices rose more quickly than expected in the United States last month, strengthening the case for more rate hikes from the Federal Reserve, and lifting the dollar," says Karl Schamotta, Chief Market Strategist at Corpay.
EUR/USD fell from 1.1199 before the release to 1.1138 within 15 minutes, a drop of 0.5% that broke through Monday's 1.1154 low.
Schamotta says traders are sharply raising the odds of an October hike, and Treasury yields are rising at the policy-sensitive end of the curve.
New York Fed President John Williams had argued only on Tuesday that one more hike this year would be enough, a view that sent the odds of an October move down to around 20%.
"A stronger-than-expected core inflation reading adds to mounting evidence that domestic price pressures are becoming more entrenched, rather than easing," says George Brown, Senior Economist at Schroders.
Brown says markets are right to expect much tighter policy, and the open question is whether the Fed will deliver it.
Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, says another hike this year cannot be ruled out and ten-year Treasury yields could keep rising.
What's Next for EUR/USD
The case for a limited move rests on how much Fed tightening was already priced before the data.
Societe Generale's Kit Juckes said in a recent update that market pricing for the Fed Funds rate stood just below 5%, already above the highest forecast in the Bloomberg survey, and that only a core reading well above consensus would lift it further.
Corpay expects some of today's dollar gains to fade, though Schamotta says the Fed's calculus has shifted.
"We suspect this knee-jerk reaction could fade somewhat, but there's no question that the monetary tightening calculus has shifted," he says.
Positioning adds to the case for a bounce, with Societe Generale reporting euro short positions at their highest since December 2024, but the technical targets sit lower:
• Support at 1.1115, UOB's one-to-three-week target
• Support at 1.11, the area ING and KBC both flag
• Resistance at 1.1154, Monday's low, now overhead
• Resistance at 1.1220, the level UOB says would confirm the decline has stabilised
"A test of 1.110 remains the risk for EUR/USD," says Francesco Pesole, FX Strategist at ING.
Fed Chair Kevin Warsh speaks at the IMF on Friday, the next chance for policymakers to confirm or push back on the October hike pricing that today's data rebuilt.
A daily close back above 1.1154 would mark today's break as a false one; failing that, 1.1115 and then 1.11 are the next stops.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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