European Rate Hike Impact: EUR/USD Faces Downward Pressure

The US dollar's strength is making it difficult for the euro to avoid depreciation

EUR/USD continues to weaken during Asian trading hours, with the latest quote hovering around 1.1610. This decline is not accidental—dovish remarks from Federal Reserve officials are reshaping market expectations for rate cuts, and renewed market confidence has also boosted the attractiveness of the US dollar.

Federal Reserve Rate Cut Expectations Shift Significantly, Market Pricing Reverses

According to the latest data from CME FedWatch Tool, the market currently prices in only a 46% chance that the Federal Reserve will cut the federal funds rate by 25 basis points in December, down from 67% a week ago. Behind this shift are a series of hawkish signals coming from within the Federal Reserve system.

Kansas City Fed President Jeffrey Schmid's remarks on Friday are most representative. He emphasized that monetary policy should "resist demand growth," and stated that the current Fed policy is at a "moderately restrictive" level, which he considers appropriate. Such comments send a clear signal: the Fed's recent policy adjustments will be more cautious.

Dollar Supported by Positive Factors, Market Sentiment Reversal Boosts Safe-Haven Demand

In addition to the weakening rate cut expectations, overall market sentiment improvement has also supported the dollar. Last week, US President Trump signed a funding bill ending a historic government shutdown, with federal employees expected to resume work on Thursday. This political uncertainty dissipates, prompting investors to re-engage with US assets.

European Central Bank Cautious Stance, Rate Hike Risks Exist but Not the Main Concern

Contrasting with the Fed's conservative approach, the European Central Bank (ECB) faces a complex situation. According to Bloomberg, ECB Governing Council member Olli Rehn recently warned that the risk of inflation slowdown should not be underestimated, even though upside risks still exist—this is the subtle variable brought about by the "European rate hike impact."

Rehn pointed out that despite disruptions from Trump's tariffs, the Eurozone economy is still growing steadily, albeit at a moderate pace. He also emphasized the importance of ample banking buffers and maintaining a cautious policy stance, implying that the ECB will adopt a more cautious attitude when facing rate hike pressures.

Market Trading Logic: Fed on Hold vs ECB Cautiously Responds

All of this converges into a simple market logic: weakening expectations of Fed rate cuts increase the attractiveness of the dollar, while ECB's warnings about inflation risks suggest limited policy adjustment space in the eurozone. This creates downward pressure on EUR/USD, and investors should closely monitor further policy signals before the December Fed meeting.