Euro retreats below 1.1600, Dollar appreciates heading into the US CPI release

The Euro (EUR) is rapidly losing value against the US Dollar (USD) as the European Central Bank's (ECB) expectations of a rate hike fade. On Friday, the EUR/USD pair hit weekly lows around 1.1590, falling from its previous week's peak of 1.1650, as traders anticipate US Consumer Price Index (CPI) data to bolster hopes that the Federal Reserve (Fed) will raise interest rates next week.

Futures markets now give a 67% probability of a quarter-point rate increase following the September 15-16 Fed meeting, up from 50% the previous week, according to CME’s FedWatch Tool. Investors have been increasing their bets on the Fed's monetary tightening since Thursday, when US Producer Price Index (PPI) figures revealed a surge in inflation at the factory gate to 5.4% year-on-year (Y-o-Y) in August, up from 4.8% in July.

The core PPI also rose to 4.6% Y-o-Y from 4.3% the previous month. The upcoming US CPI release, scheduled later, is seen as the final data point to complete the Fed's monetary policy puzzle. However, analysts at Commerzbank warn that the market is anticipating multiple interest rate hikes totaling 80 basis points by the middle of next year, which could be ambitious as policymakers may argue that while headline rates are rising due to higher energy prices, the core rate remains moderate.

Commerzbank also notes that it is uncertain if the new Fed Chair will be willing to raise interest rates, and even if today's figure is a clear signal, it does not guarantee that the Fed (and thus the USD) will ultimately act. In the Eurozone, the ECB raised its benchmark Rate on the Deposit Facility by 25 basis points to 2.5% for the second straight time, signaling a hawkish stance and expressing the belief that inflation will stay above the bank's 2% target until at least 2027.