Euro drops to lowest level since mid-2025 as US inflation hits 4.1%

The euro slid to its weakest point against the US dollar in over a year on Wednesday, touching 1.1329 before stabilizing near 1.1342 on Thursday after fresh inflation data confirmed the Federal Reserve's hawkish stance remains warranted. The EUR/USD pair has shed roughly 3% over the past month alone, extending a broader year-to-date decline from the 1.17 area where it began 2026.wise+2

Hot PCE Data Reinforces Dollar Dominance

Thursday's release of the May Personal Consumption Expenditures price index — the Fed's preferred inflation gauge — showed headline PCE rising 4.1% year-over-year, the highest since early 2023, while core PCE climbed to 3.4%. The figures largely matched economist forecasts, providing a brief reprieve for markets but doing little to alter expectations that the Federal Reserve will maintain elevated interest rates or potentially hike further this year.reuters+1

The Fed held its benchmark rate at 3.50%–3.75% at its June meeting, the fourth consecutive hold, while its latest Summary of Economic Projections revised 2026 core inflation sharply higher to 3.3%. J.P. Morgan JPMorgan Chase & Co. ↘ 1.82% now sees EUR/USD hovering between 1.13 and 1.15 over the next three quarters, having cut its previous target of 1.20.kraken+2

Dual Tightening, Diverging Outcomes

The European Central Bank also raised rates on June 11, lifting its deposit rate to 2.25% in its first hike since September 2023, citing inflation pressures from the Middle East conflict that has driven energy costs higher. Yet the move has failed to support the euro, as the Fed's benchmark remains more than 125 basis points above the ECB's, maintaining a wide interest rate differential that favors dollar-denominated assets.cnbc+1

Reuters polling suggests the ECB will likely hike once more in September, but analysts note the eurozone economy is faltering under elevated energy costs even as inflation runs at 3% for the year. BNP Paribas Wealth Management has set a three-month EUR/USD target of just 1.14.reuters+2

Outlook Turns Bearish

The pair's slide marks a reversal from consensus forecasts entering 2026, when most major banks — including UBS ↘ 1.45% and ING ↘ 1.88% — expected dollar weakness and euro gains toward 1.20 or higher. That thesis has unraveled as US inflation proved stickier than anticipated, fueled by geopolitical energy shocks that simultaneously undermine Europe's growth prospects while keeping the Fed firmly on hold or leaning toward further tightening.ubs+1

With EUR/USD now testing the 1.13 handle — a level last seen in June 2025 — traders are watching whether the pair can hold above the psychologically important 1.13 support or risks a deeper slide toward 1.11, the lower bound of analyst projections for the year.tradingeconomics+1