Energy prices are rising, compounded by increasing expectations of interest rate hikes from the Federal Reserve! The euro has fallen to a two-week low, and options traders are ramping up their hedging.

As energy prices rise and expectations of the Federal Reserve's interest rate hikes increase, the pressure on the euro has intensified, causing the euro to fall to a two-week low against the dollar as of press time, the exchange rate of the euro to the dollar has dropped by 0.18%, priced at 1.1571. Meanwhile, options traders are scrambling to take measures to hedge against further declines in the euro. The positioning indicator in the options market has reached its most bearish level for the euro in nearly a month. Over the past nine trading days, the market has continuously favored the dollar, marking the longest such trend since 2017. As the market begins to hedge against further weaknesses in the euro, tensions between the U.S. and Iran have escalated again, driving up the prices of oil and natural gas. Rising energy costs will adversely affect the euro, as they will worsen the trade conditions in the European region. Additionally, after Federal Reserve Chair Waller signaled a hawkish stance last week, the market currently assesses the probability of an interest rate hike by the Fed this month at 71%, up from 38% the previous week. These two significant risks have led Chris Turner, global market head at ING, to predict that the euro-to-dollar exchange rate may further drop to around 1.15 by the end of this month. Kit Juckes, chief foreign exchange strategist at the French Industrial Bank, stated, The euro against the dollar should decline further this year, but not as much as I previously expected. He set the year-end target for the euro to dollar exchange rate at 1.15. The outlook for the euro may also face "collateral damage" from geopolitical risks there are no signs of an end to the Russia-Ukraine conflict or the Middle Eastern wars, and France will hold a key presidential election next year. Valentin Marinov, head of G10 foreign exchange research and strategy at Crdit Agricole, said, The euro against the dollar is suffering from collateral damage due to geopolitical risks. Political and financial risks in Europe may also worsen after local elections in Germany this month, and ahead of the 2027 French presidential election. Mark McCormick, chief foreign exchange strategist at Bank of Montreal, even indicated that the euro to dollar exchange rate could fall to 1.12 before the French presidential election approaches. It is worth noting that insufficient natural gas storage in Europe could trigger inflation to rise again, forcing the European Central Bank to tighten monetary policy at a faster pace, which could serve as a supporting factor for the euro. However, at the same time, the rising prices of energy such as natural gas and higher interest rates may also weigh on the already fragile economic recovery in the eurozone, potentially turning into a bearish factor for the euro.