Euro languishes below 1.1500 in the aftermath of Fed’s hawkish hike

The Euro (EUR) is trading at or near its lowest point in one-and-a-half months on Thursday, as the US Dollar (USD) remains strong. This comes after the Federal Reserve (Fed) announced a quarter-point rate hike, the first in three years, on Wednesday. Fed Chairman Kevin Warsh took a particularly hawkish stance, stating that inflation is still elevated and the economy appears to be strengthening.

This unexpected message bolstered confidence in the Fed's independence and increased expectations of additional rate hikes later in the year, causing the USD to rally against its main competitors. In the Eurozone, the latest Harmonised Index of Consumer Prices (HICP) data released on Thursday showed that price pressures increased to 0.4% in August, from 0.2% in July.

The year-over-year (Y-o-Y) inflation rate was revised down to 3.2% from the previous estimate of 3.3%. The Core HICP, which excludes volatile components, also showed a 0.2% growth and a 2.4% Y-o-Y rise. Analysts at ING believe the risks are leaning towards the downside for the Euro, given the Fed's hawkish stance and higher oil prices.

The model they use now predicts a short-term fair value of 1.1500, which is 1% lower than it was a week ago. ING warns that further moves in front-end rates, oil, or global equities could push that fair value even lower. The HICP, released by Eurostat on a monthly basis, is a harmonized measure of inflation across all European Monetary Union member states.

The year-over-year (YoY) reading compares prices in the reference month to the same month a year earlier. High HICP readings are generally seen as bullish for the Euro, while low readings are considered bearish.