The euro reached its lowest level since mid-June due to growing expectations that the European Central Bank (ECB) may pause rate hikes. ECB policymakers are concerned about weakening growth prospects and there is momentum for a pause in interest rate increases. German business data showed a deterioration in August, raising fears of a second recession within a year. The euro briefly hit $1.0766 before rebounding slightly.
The US dollar, on the other hand, saw some caution before a speech by Federal Reserve Chair Jerome Powell. The dollar index, which measures the US currency against six others, reached its highest level since June 6, but later declined during London trade. Powell’s speech at the Jackson Hole Economic Policy Symposium is anticipated to maintain the possibility of a rate hike by the Federal Reserve, while there is less conviction about further tightening by the ECB.
Both the euro and sterling were negatively affected by weak business activity data, leading investors to reduce their bets on further rate hikes in Europe and Britain. Sterling reached its lowest level since June before recovering slightly. Meanwhile, the dollar index is on track for its sixth consecutive week of gains, supported by signs of resilience in the US economy that suggest rates will remain higher for longer.
The market is entering Powell’s speech with a hawkish bias, with odds of a rate hike next month increasing to slightly over 20%. The yen also weakened as it approached the level at which Japanese authorities intervened last year, keeping traders alert for similar moves.