Euro slips back to its summer low as ECB President Lagarde urges measured hikes

Traders experienced a setback as the Euro slipped to its lowest point in summer, with EUR/USD dropping to near 1.1350. The currency pair had previously broken below 1.1400 three sessions ago. ECB President Lagarde addressed a European Parliament committee, stating that the energy crisis is too significant to overlook, but a measured reaction is necessary as energy costs have not yet impacted wages.

Eurozone inflation stood at 3.2% in August, with energy prices increasing by 14.3% year-over-year. The ECB's projections for September anticipate an average of 3.0% inflation for the year and 2.5% in 2027. Lagarde also mentioned that long-term interest rates have risen since the ECB's September meeting, slowing growth and reducing the energy cost pass-through beyond the ECB's initial projections.

Higher yields in Europe typically support the Euro, but she considered them as work the ECB no longer needs to accomplish. Traders anticipated fewer ECB rate hikes and a smaller increase for the Euro against the Dollar, which is backed by the Fed's projected interest rate range of 3.75%-4.00%. The ECB raised its deposit rate to 2.50% on September 10, the second increase of the year, with futures pricing a 60% chance of another hike on October 29.

The October decision will come after the Fed's, so the ECB will be aware of any widening gap in US rates. The Governing Council meeting on Wednesday is non-monetary, with no rate decision planned. Lagarde will speak on Tuesday at 11:00 GMT and Thursday at 13:30 GMT, as well as 13 additional ECB speeches before the flash Harmonised Index of Consumer Prices (HICP) for September at 09:00 GMT.

Headline inflation is expected to be 3.6% year-over-year, up from 3.2%, with the core inflation figure, excluding energy, food, alcohol, and tobacco, at 2.5% from 2.4%. The core figure reflects the second-round effects Lagarde believes the ECB has yet to witness, making a 2.5% or higher reading potentially challenging for the measured approach before October 29.