Euro Hits 4-week High

The euro fell to $1.15, its lowest level since late March, as the US dollar strengthened broadly following the Fed’s latest monetary policy decision. While the Fed left interest rates unchanged, as widely expected, policymakers’ projections were viewed as hawkish, with around half of officials anticipating at least one rate hike in 2026. In Europe, the ECB raised interest rates by 25 basis points last week, in line with expectations, as it continues to combat elevated inflation. However, following the preliminary agreement between the US and Iran, money markets have scaled back expectations for further ECB tightening, now pricing in less than 30 basis points of additional rate hikes this year. ECB policymaker Gediminas Šimkus reiterated on Wednesday that upside risks to inflation continue to justify further monetary tightening. He said he expects at least one more rate hike to help keep inflation expectations anchored.

The euro held steady at $1.16 as investors awaited details of the US-Iran peace agreement and the Federal Reserve’s monetary policy outlook. Global sentiment improved on a sharp drop in oil prices, with markets on edge ahead of Friday’s signing of the US-Iran deal. The agreement follows a preliminary accord to end the conflict and reopen the Strait of Hormuz after nearly four months of war. Money markets have scaled back bets on ECB tightening, now pricing in less than 30 basis points of hikes this year, equivalent to just one increase. ECB policymaker Gediminas Šimkus reiterated on Wednesday that upside inflation risks still justify further tightening, expecting at least one more hike to keep inflation expectations in check. Later today, attention will shift to the Fed’s policy decision, with focus on updated FOMC projections and new Chair Kevin Warsh’s commentary on the interest rate outlook.

The euro rose to $1.16, its highest since early June, as investors embraced riskier assets after the US and Iran agreed to end their three-month conflict. The deal, lifting the US blockade and reopening the Strait of Hormuz, will be signed in Switzerland on Friday, though uncertainty lingers as markets await further details and the status of Iran’s nuclear program remains unresolved. Oil prices plunged, easing inflationary pressures and reducing expectations for rate hikes. Money markets now anticipate about 30 basis points of further ECB tightening this year, equivalent to one rate hike, down from nearly two before last Thursday’s increase. ECB President Christine Lagarde welcomed the news but warned of past dashed hopes and emerging second-round effects from the conflict. ECB’s Joachim Nagel added that oil supply recovery would take months, delaying any inflation relief.