Euro falls as hawkish Fed expectations boost the US Dollar, Treasury yields

The Euro (EUR) extends losses against the US Dollar (USD) on Friday, with EUR/USD slipping to near one-month lows as hawkish Federal Reserve (Fed) expectations boost the Greenback and US Treasury yields. At the time of writing, the pair is trading around 1.1626 and is poised to close the week in negative territory.

Higher energy prices linked to supply disruptions in the Middle East continue to deteriorate the inflation outlook across major economies. In the United States, inflation accelerated sharply for a second consecutive month in April, while consumer spending remained resilient.

The latest batch of US economic data strengthened expectations that the Fed could keep borrowing costs unchanged in the coming months as policymakers assess the broader impact of rising energy prices on inflation.

However, traders are growing more confident that the Fed could raise interest rates by year-end, with the CME FedWatch Tool showing nearly a 50-50 chance of a rate hike at the December meeting.

The hawkish repricing is helping the US Dollar extend its rebound from recent lows and driving Treasury yields higher. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, climbed above the 99.00 mark, reaching its highest level since April 8, while the benchmark 10-year US Treasury yield advanced to a one-year high.

Similar to the United States, inflation in the Eurozone also accelerated in April. Investors expect the European Central Bank (ECB) to raise interest rates at least twice this year, with a hike at the June meeting fully priced in.

The ECB faces a difficult balancing act as the Eurozone economy remains highly exposed to rising energy costs, raising concerns over whether policymakers can contain inflation without damaging economic growth.

On the geopolitical front, US-Iran negotiations remain deadlocked over Tehran’s nuclear program, raising fears of a prolonged conflict. Although a fragile ceasefire appears to be holding, the Strait of Hormuz remains under blockade, keeping Oil prices elevated.

Iran’s Foreign Minister Abbas Araghchi said on Friday that the US is sending “contradictory messages” on negotiations and added that Iran is prepared for both fighting and diplomatic solutions. US President Donald Trump said he would support Iran suspending its nuclear program for 20 years if the commitment was “real,” while warning that the US could resume military strikes if no agreement is reached.