Euro weakens below 1.1350 on higher US Treasury yields, Lagarde's dovish tilt

The Euro dropped below 1.1350 against the US Dollar on Thursday, as higher US Treasury yields bolstered the greenback. After the US Weekly Initial Jobless Claims report and Fed Chairman Jerome Powell's remarks, investors focused on the US Personal Consumption Expenditures (PCE) Price Index. Released on Wednesday, the index rose 0.3% month-over-month in August, but the annual core rate was below expectations at 3.0%.

Traders now anticipate only a 38.2% chance of a quarter-point Fed rate hike next month, down from 51% the previous day. Despite scaling back expectations for a rate increase in October, analysts predict another hike in December, aiming to keep inflation in check. ECB President Christine Lagarde commented that rising bond yields could hinder economic expansion and limit the transmission of high energy costs to inflation.

She suggested a measured response to maintain price stability, with the bank targeting a 25 basis point rate hike in December. Market participants anticipate the Eurozone's central bank will allow rates to reach a mildly restrictive level by year-end, with OIS markets pricing around 31 basis points of tightening by year-end, 100 basis points cumulatively by 2027, and a terminal rate nearing 3.5%.

TD Securities maintains a bullish EUR/USD forecast for year-end, having recently expressed the view via 3-month risk reversals, fading the broad-based USD rally.