Sticky US core inflation and a run of hawkish comments from European Central Bank officials have strengthened expectations that both the Federal Reserve and ECB could raise rates again this year. December is seen as the more likely window, while October meetings may offer clues on the policy path. For EUR/USD, the key question is not simply whether either central bank hikes, but how much additional tightening markets expect from each.
US core inflation remains firm at 2.6%
September data showed that price pressures were not limited to higher energy costs. US core consumer prices rose more than expected, lifting the annual rate by 0.2 percentage points to 2.6%. The measure stood at 2.5% at the start of the year and has yet to establish a sustained downward trend.
The inflation gauge preferred by the Fed is telling a similar story. Core personal consumption expenditures (PCE) prices are running at about 3%, close to their level at the start of the year and above the corresponding core CPI reading. If core inflation stays elevated, policymakers may conclude that previous tightening has not yet done enough to restore price stability.
The dollar initially strengthened after the latest inflation figures, pushing EUR/USD down to nearly 1.11. The pair then rebounded sharply above 1.12, with the dollar giving back its gains quickly. That reversal may indicate that markets had already priced in much of the prospect of further rate increases. The lack of a pronounced technical rebound during the pair's recent decline has also put the possibility of a short-term recovery on traders' radar.
December emerges as the Fed's likely window
Inflation remains central to the Fed's assessment of whether its tightening cycle can end. Kevin Warsh has argued that policy decisions should reflect the broader economic picture rather than hinge on a single data release.
With core inflation still high, expectations for further tightening have increased. But a rate hike at the end of October, before the congressional elections, is seen as less likely. December is viewed as a more plausible window for the Fed's next move, by which time policymakers will have more data to assess inflation and economic conditions.
ECB officials leave the door open to another hike
Policy debate within the ECB has also taken a more hawkish turn. Klaas Knot, the former head of the Dutch central bank, has said that changes in the economic and geopolitical environment could call for policy to remain moderately restrictive.
Governing Council member Pierre Wunsch said another rate increase could still be needed. Gediminas Simkus has also said the case for a more restrictive monetary stance has strengthened since September.
Simkus singled out the December meeting as important, saying policymakers would have a fuller set of data by then, while noting that the October meeting also merits attention. The comments have added support to expectations of one more ECB rate hike this year, with December viewed as the more likely timing.
EUR/USD hinges on the scale of tightening
If both the Fed and ECB could raise rates again this year, hawkish signals from Fed officials alone may not give the dollar a lasting advantage. The exchange rate is more likely to respond to shifts in the expected scale of tightening on each side: the currency associated with the larger cumulative adjustment could gain relative support from policy expectations.
If markets revise expectations for both central banks in a more hawkish direction at the same time, the net effect of rate expectations on EUR/USD may be limited. Investors will watch the October meetings for policy signals and assess whether the data available before December alter expectations for the timing or size of either central bank's next move.