Euro heads for weekly loss against US Dollar on hawkish Fed outlook

The Euro (EUR) is facing a potential weekly decline against the US Dollar (USD) due to the Federal Reserve's (Fed) aggressive policy stance, which is boosting the strength of the USD. Oil prices and US Treasury yields are contributing to the downward pressure on the EUR/USD pair. The pair is currently trading around 1.1462, near the levels last seen in late July.

Oil prices have declined this week, causing US Treasury yields to deviate from multi-year highs as Saudi Arabia attempts to reroute exports and restore its East-West pipeline. However, the downward trend in oil prices is limited since Middle East supply risks persist and inflation risks remain on the upside. WTI Oil is currently at $97.20, recovering from an intraday low of $94.63.

The recovery in oil prices is pushing Treasury yields higher, with the benchmark 10-year yield trading around 4.98%, close to the 2007 high of 5.04%. The Fed's decision to raise the federal funds rate by 25 basis points to the 3.75%-4.00% range earlier this week, with 16 of 18 officials expecting more hikes this year, has reinforced the demand for the USD.

The US Dollar Index (DXY), which tracks the Greenback against six major currencies, is trading above 100.50, its highest level in seven weeks. Traders see a 55% probability of another 25-basis-point Fed rate hike in October. The Eurozone is also expected to maintain its tightening stance following the ECB's second rate hike of the year earlier this month.

ECB President Christine Lagarde stated that growth is "a bit more promising than we thought" and that policymakers are "not seeing second-round effects yet." However, energy prices are a significant variable, and the ECB is prepared to respond accordingly, emphasizing that rate decisions will be made meeting-by-meeting.