Euro tests two-week lows as risk aversion, Fed tightening bets buoy the US Dollar

The Euro (EUR) is trading lower against the US Dollar (USD) for the second consecutive day on Wednesday, weighed by risk aversion amid growing tensions in the Middle East, while rising bets of Federal Reserve (Fed) interest rate hikes support speculative demand for the US Dollar. The EUR/USD pair trades at 1.1580,  after being rejected at the 1.1620 area on Tuesday.

Geopolitical tensions are hurting investors' appetite for risk as reciprocal attacks between the US and Iran escalate, casting further doubt about a negotiated end of the war and pushing Crude Prices higher. Brent Oil trades at $94.00, nearly 7% up on the week, posing a significant challenge for the Eurozone’s economies as the increasing energy costs might dampen an already frail growth.

The US military launched a wave of strikes on Islamic Revolutionary Guard Corps (IRGC) targets across Iran, which were responded to with attacks on US bases in Bahrain, Jordan and Iraq, amid Tehran's accusations that the US bombings killed 18 civilians celebrating a wedding on Tuesday.

US data disappoints but fails to curb Fed tightening hopes

In the US, macroeconomic data disappointed on Tuesday. The US ISM Manufacturing Purchasing Managers Index (PMI) slowed down beyond expectations in August, with the prices paid sub-index flat and the employment gauge retreating from July’s high.

Beyond that, US JOLTS Job Openings increased below expectations in July. These figures, however, failed to dent hopes that the Federal Reserve will hike rates by a quarter percentage point at its September meeting. The CME Group’s FedWatch Tool shows a 68% chance of a rate hike later this month, nearly twice last week’s 36% rating.

In the Eurozone, data from Spain revealed that unemployment increased well beyond expectations in August and that the Italian Producer Prices Index accelerated in July. Also on Wednesday, the European Central Bank (ECB) Committee member, Joachim Nagel, affirmed that “markets see over 95% chance of a September rate hike”, yet with no visible impact on the Euro as that outcome has already been priced in.