Euro Slightly Up on ECB-Fed Policy Divergence

The euro weakened toward $1.14, touching its lowest level since July 29, as falling oil prices prompted traders to scale back expectations for further ECB rate hikes, while the US dollar remained supported by expectations of additional Federal Reserve tightening. Brent crude fell below $100 a barrel amid signs of progress in US-Iran talks and continued efforts to restore operations at a key Saudi Arabian pipeline.ECB official Joachim Nagel said oil prices were becoming an increasingly important factor for policymakers and left the door open to further hikes, citing still-high core inflation but saying he saw no significant second-round effects so far. ECB Chief Economist Philip Lane, however, warned that another surge in energy prices could keep eurozone inflation elevated for longer than previously expected. Meanwhile, stronger-than-expected flash PMI data showed eurozone private-sector activity expanding in September at its fastest pace in almost three-and-a-half years.

The euro weakened to $1.145, its lowest level since late July, as investors assessed developments in the Middle East while the USD remained supported by expectations of further Federal Reserve rate hikes. Brent crude resumed its decline after reports that Iran had offered to reopen the Strait of Hormuz within seven days if Washington lifts its military blockade of Iranian ports. Meanwhile, ECB’s Chief Economist Philip Lane warned that a new wave of higher energy prices could keep Eurozone inflation elevated for longer than policymakers initially anticipated. He said the shock should result in higher and more persistent inflation before a decline toward the ECB’s target from mid-2027. Following this month’s second rate hike since the Iran war sent energy costs soaring, ECB officials have begun laying the groundwork for further tightening. Eurozone inflation is expected to reach around 4% in coming months, with the ECB projecting 3% this year and 2.5% next year, well above its 2% target.

The euro weakened to $1.145, touching its lowest level since late July, as higher oil prices weighed on sentiment while the US dollar remained supported by expectations of further Federal Reserve rate hikes. Brent crude rose after touching its lowest level since September 10, with ongoing Middle East tensions keeping markets focused on energy flows and potential diplomatic efforts at this week’s UN meetings. Investors are also monitoring political uncertainty in Germany and mounting concerns over France’s public finances. Germany’s governing CDU suffered its worst-ever state election result in Mecklenburg-Western Pomerania, failing to win a single seat and prompting some party members to call for Chancellor Friedrich Merz to step down after 16 months in office. Meanwhile, France’s fiscal position remains under scrutiny as the government struggles to reduce its budget deficit, which stands at more than 5% of GDP, ahead of a divisive election next year.