Euro Slumps to 2-1/2-Month Low

The euro fell below $1.15, hitting its lowest level since late March, amid broad dollar strength as traders reacted to a more hawkish stance from the US Federal Reserve, which kept interest rates steady but revealed in its latest projections that nine policymakers now anticipate a rate hike by the end of 2026. This shift came after the European Central Bank raised rates last week and the Bank of Japan followed with a similar move earlier this week. Markets are now pricing in at least one additional ECB rate increase before year-end. Adding to the market dynamics, investors responded positively to reports of a US-Iran agreement to reopen the Strait of Hormuz, which drove oil prices to three-month lows and eased inflation pressures. Still, tensions persisted, with US President Donald Trump warning of potential renewed attacks and targeted actions against Iranian officials if the agreement’s terms were not upheld.

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.