Euro drops to monthly lows below 1.1550 amid high Oil pisces, Fed hiking bets

The Euro (EUR) continues its decline against the US Dollar (USD) on Monday, hit by risk-averse markets, soaring oil prices above $100, and a stronger US Dollar as expectations of a Federal Reserve (Fed) rate hike next week grow. The EUR/USD pair is trading at fresh monthly lows below 1.1550 after slipping from 1.1650 highs last week.

The common currency faces challenges due to Brent Oil trading near $104.00, which has appreciated by over 20% in the past two weeks. This surge in energy prices poses a serious threat to the Eurozone's economic growth and adds pressure for the European Central Bank (ECB) to tighten monetary policy further. Meanwhile, the US Dollar finds some support from risk aversion and optimism that the Fed will hike the Federal Funds Rate by 25 basis points to the 3.75%-4.00% range on Wednesday.

Recent US Consumer Price Index (CPI) data revealed that core inflation surged in August at its fastest pace in two months, prompting the central bank to tighten policy or face a credibility crisis. Experts at MUFG/BTMU warn that if the Fed fails to act this week to address rising inflation risks, it could lead to a sharp sell-off for the US Dollar and long-term US Treasuries, undermining confidence in their ability to control inflation.

Analysts also suggest that US Dollar strength in the short term might be limited due to the proximity of the US mid-term elections.