Euro Softens to $1.17 as Markets Eye Interest Rate Outlook

The euro hovered just above $1.14, little changed from recent sessions, as rising oil prices heightened inflation concerns. Crude climbed back above $73 per barrel after attacks in the Strait of Hormuz underscored ongoing risks to shipping. Traders boosted bets on ECB rate hikes after official Isabel Schnabel warned of lingering economic effects from the Iran conflict, with core inflation still elevated. However, gains were capped by softer inflation data and ECB President Lagarde's dovish remarks last week on a more balanced inflation and growth outlook. Germany’s cabinet approved a 2027 budget draft on Monday, with €555.4 billion in planned spending and borrowing rising to €203.6 billion, up from April’s €196.5 billion estimate. In France, far-right leader Marine Le Pen was cleared to run in the 2027 presidential election despite a one-year electronic monitoring sentence. Polls still show the National Rally leading, while the centrist camp lacks a clear successor to Emmanuel Macron.

The euro held steady at $1.14 as investors processed fresh economic data while awaiting new catalysts. Eurozone retail sales rose 0.2% in May, slightly below the expected 0.3% increase, while producer price inflation climbed more than anticipated to 5.9% year-over-year. German factory orders rebounded 1.9%, exceeding forecasts of 1.2%, but the S&P Global Construction PMI indicated a steeper contraction in the bloc’s building activity in June. Last week, the euro gained 0.5% against the USD following weaker-than-expected US nonfarm payrolls. However, gains were limited by softer inflation and dovish remarks from ECB President Christine Lagarde, who noted a more balanced outlook for euro-area inflation and growth. Markets now view one additional 25-basis-point ECB rate hike this year as likely, though not certain, following June’s move. In Germany, the cabinet approved the 2027 budget draft, with spending at €555.4 billion and borrowing at €203.6 billion, up from earlier estimates.

The euro ended the week just above $1.14, gaining 0.5% as the dollar weakened following disappointing US nonfarm payrolls. The US economy added only 57,000 jobs last month, far below expectations, while the unemployment rate unexpectedly fell to 4.2% as workers left the labor force. The euro’s advance was capped by softer Eurozone inflation and dovish comments from ECB President Christine Lagarde, which reduced expectations for a third ECB rate hike this year. Markets still favor a second hike as the most likely outcome. June data showed headline inflation slowing to 2.8% from 3.2% in May, below forecasts, while core inflation eased to 2.4%, also missing expectations. At the ECB’s Sintra Forum, Lagarde noted that risks to euro-area inflation and growth had diminished, citing lower energy price pressures from the US-Iran peace deal.