Under the dual pressure of energy and political risks, the euro has fallen to a near two-month low, with 60% of options traders betting on further weakening.

According to Jinzhong Finance APP, the euro fell to a nearly two-month low against the US dollar after the latest Fed rate hike, as options traders increased their bets on a further decline in the euro.

The euro weakened for the third consecutive trading day on Wednesday, depreciating by 0.2% to 1 euro for 1.1426 US dollars. Options indicators show market sentiment is increasingly turning bearish, with positioning for the end of the year approaching levels last seen in mid-August.

This trend coincides with markets pricing in further tightening by the Fed, eroding the “policy divergence” theme that supported the euro throughout the summer. Persistently high energy prices add another headwind, weighing on the eurozone's growth outlook—even though oil prices are heading for their sixth consecutive daily decline.

Euro’s losses deepen, yearly low approaching

Data from the Depository Trust & Clearing Corporation (DTCC) show that this shift has accelerated since last week’s Fed decision. After the latest ECB rate hike, option exposure was almost evenly split between bullish and bearish, but since the Fed meeting, about 60% of the total notional amount has bet on a weaker euro.

European Central Bank Governing Council member Joachim Nagel stated that if high energy prices persist, officials may have to raise interest rates to levels that dampen economic growth. “They may have to move into a mildly restrictive monetary policy zone,” he said.

The contrast with the US economy still supports the dollar. Although tightening by other major central banks may limit the dollar’s ability to reach new cycle highs, Elias Haddad, global markets strategy head at Brown Brothers Harriman in London, said, “The US’s growth advantage over other major economies tilts dollar risks to the upside.”

DTCC data also show that euro hedges are extending further along the curve. Since the Fed meeting, the weighted average maturity of bearish euro positions has lengthened by more than 10%, and lower strike prices have attracted more interest.

Bearish bets on the euro have increased after the ECB meeting

Political uncertainty is also exerting pressure. France is facing another tough budget dispute in its divided parliament, while Friedrich Merz’s CDU is grappling with the fallout from its historic worst showing in a German state election.

Matthew Hornbach, global macro strategy head at Morgan Stanley, said that higher US interest rates and unfavorable euro political risk premiums are making it more difficult for the euro to strengthen against the dollar.

Deutsche Bank, however, believes there is limited downside for the euro. Its analysts expect the euro to US dollar exchange rate to remain range-bound, reasoning that resilient global growth and the dollar's notable tail risks should limit euro weakness, while Fed hikes and high energy prices cap the upside.