Euro Rebounds as Dollar Weakens on Soft US Inflation

The euro climbed to $1.145, its strongest level since June 19, supported by broad dollar weakness after softer-than-expected US inflation data eased pressure on the Federal Reserve to raise rates this year. Investors also reacted to escalating Middle East tensions and rising oil prices, which fueled concerns about inflation’s impact on monetary policy and economic growth. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, heightening uncertainty over energy flows. Markets responded by pricing in further European Central Bank rate hikes, with money markets now expecting a deposit rate of 2.70% by December (up from 2.25%) and fully anticipating a September increase.

The euro held just below $1.14, nearing a one-year low against the US dollar, as investors reacted to escalating Middle East tensions, rising oil prices, and growing concerns about inflation’s impact on monetary policy and economic growth. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows. Markets responded by pricing in further European Central Bank rate hikes, with money markets expecting a deposit rate of 2.70% by December, up from 2.25%, and fully anticipating a September increase. In the US, Fed Governor Christopher Waller warned that the central bank may need to raise rates "in the near term" if inflation remains above the 2% target. Investors now await remarks from Federal Reserve Chair Kevin Warsh and US inflation data later today.

The euro opened the week at $1.14, nearing its one-year low from June, as investors responded to escalating Middle East tensions. Oil prices surged after another round of US strikes on Iran, with both sides disputing the status of the Strait of Hormuz. The US Central Command reported striking dozens of targets to weaken Iran’s ability to threaten shipping in the waterway. Iran, however, announced on Sunday that the strait would remain closed "until further notice." The uncertainty fueled inflation concerns, leading investors to bet on further European Central Bank interest rate hikes. The ECB had already raised rates in June for the first time since 2023. Now, markets expect two additional hikes over the next year, with the first likely in September, to counter inflation driven by rising fuel costs tied to the Iran conflict. ECB policymaker Yannis Stournaras warned on Friday that the central bank is "back to square one" in its battle against high inflation in the eurozone.