Euro plays off losses after change in Fed rate expectations

On Tuesday morning, September 1, the EUR/USD pair is trading in the range of 1.1603-1.1624 dollars. The euro slightly rebounded upward after Monday's correction. The main event of recent days was the speech by Federal Reserve Chairman Kevin Warsh at the Jackson Hole symposium.

His more hawkish rhetoric on inflation has noticeably changed market expectations: the probability of a Fed rate hike at the September meeting has risen to about 65% versus 35–40% earlier. This supported the dollar and pushed EUR/USD to lows around 1.1580-1.1600.

However, at the start of the new week, the dollar partially gave up its gains. The DXY index fell by about 0.2–0.24% on August 31, while the euro managed to recover slightly. Investors do not yet consider a Fed rate hike in September a foregone conclusion: much will depend on fresh labor market statistics (due to be released on Friday, September 4) and US inflation.

An additional uncertainty factor remains the situation on the energy market. Against the backdrop of a new escalation in the conflict between the US and Iran, the price of Brent crude oil has risen above $90 per barrel again, heightening concerns about a new round of inflation. High oil prices simultaneously put pressure on the European economy and increase the likelihood of tighter monetary policy both in the US and the Eurozone.

This means a rather complex situation for the euro. On the one hand, a potential Fed rate hike is an argument in favor of the dollar. On the other, the European market is also pricing in the possibility of ECB policy tightening amid rising energy inflation. Therefore, the difference in expectations regarding Fed and ECB rates remains the main driver of EUR/USD.