Euro Rebounds as Weak US Jobs Data Weighs on Dollar

The euro weakened to around $1.16, touching its lowest level since August 19, as investors turned to the US dollar following hawkish remarks from Federal Reserve Chair Kevin Warsh, despite European data pointing to renewed inflationary pressures. In his first major speech since becoming chair in May, Warsh warned that inflation has not meaningfully slowed and that policymakers need clearer evidence of easing price pressures, otherwise the Fed still has “work to do.” Meanwhile, inflation data from France and Spain strengthened expectations for further ECB tightening. EU-harmonized inflation rose to 2.7% in France and 4.5% in Spain, the latter its highest since 2023. Markets now see the ECB deposit rate rising to 2.80% by March next year from 2.25% currently, with roughly a 60% chance of a hike to 3%. Recent ECB minutes and Reuters reports also pointed to a possible September hike, although policymakers remain reluctant to signal further tightening.

The euro was little changed at $1.165 as investors digested economic data and awaited Federal Reserve Chair Kevin Warsh’s speech at the Jackson Hole symposium for clues on the US rate outlook. Meanwhile, inflation data from France and Spain showed renewed price pressures, strengthening expectations of an ECB rate hike in September. EU-harmonized inflation rose to 2.7% in France, a three-month high, while Spain’s climbed to 4.5%, its highest since 2023 and more than double the ECB’s 2% target. Markets now price the ECB deposit rate at 2.80% by March next year, up from 2.25% currently, and around 2.90% by late 2027, implying roughly a 60% chance of a hike to 3%. Recent ECB minutes pointed to another likely increase, while Reuters reported that policymakers are prepared to raise rates in September to contain the economic fallout from the Iran war, though they remain reluctant to signal further tightening beyond that.

The euro edged below $1.165, retreating from the near three-month highs reached last week, as investors assessed the pause in the recent oil price decline and the outlook for ECB interest rates. Attention is also turning to Federal Reserve Chair Kevin Warsh's speech on Friday at the annual Jackson Hole gathering for further clues on the Fed's policy path. Meanwhile, prospects for an agreement to reopen the Strait of Hormuz remain uncertain amid conflicting signals from Iran. Qatar's prime minister is due to visit Tehran on Thursday to revive US-Iran diplomacy, with the two sides still divided over control of the key waterway. In money markets, traders are pricing about 40 bps of additional ECB tightening by year-end, with a September rate hike almost fully priced in. ECB policymakers said they are prepared to raise rates at their September meeting to contain the economic fallout from the Iran war, although they remain reluctant to signal further tightening beyond that.