Euro Under Pressure on ECB Signals, New Tariffs

The euro remained below $1.14, as investors assessed the ECB's policy decision, new US tariffs, and escalating tensions in the Middle East. The ECB left interest rates unchanged as expected but strongly signaled that a September rate hike is increasingly likely. Rising energy prices, with oil nearing $100 per barrel and natural gas surging amid the US-Iran conflict, have reinforced inflation concerns and strengthened expectations that the ECB will resume tightening after the summer, when updated economic forecasts are released. Several ECB policymakers, including Bundesbank President Joachim Nagel, warned that inflation risks remain elevated and that further rate increases may be needed. Meanwhile, the US imposed new tariffs on imports from 60 trading partners, including the EU. The European Commission gave the measures a cautious welcome, saying they are broadly consistent with the tariff commitments agreed under the EU-US Joint Statement.

The euro fell below $1.139 on Thursday after the European Central Bank left its key interest rates unchanged at its July meeting, in line with market expectations. Policymakers maintained a cautious, data-dependent stance, stressing a wait-and-see approach amid heightened uncertainty, particularly around energy prices. After delivering its first rate increase in three years in June, the ECB reiterated that future policy decisions will depend on incoming economic data. Since then, softer inflation, weaker wage growth, slower economic activity and lower inflation expectations have reduced the urgency for further tightening. However, the recent surge in oil prices driven by escalating tensions in the Middle East has renewed concerns that higher energy costs could feed into inflation and delay policy easing. Despite those risks, money markets continue to price in at least two ECB rate cuts by year-end, with the next move fully expected in September.

The euro strengthened toward a one-week high of $1.142 on Thursday as investors awaited the European Central Bank's policy decision, with policymakers widely expected to leave interest rates unchanged while keeping the door open to a potential hike in September. The ECB delivered its first rate increase in three years in June and signaled that further easing would depend on incoming data. Since then, softer readings on inflation, wage growth, economic activity, and inflation expectations have reduced the urgency for another move. However, the recent surge in oil prices amid escalating tensions in the Middle East has revived concerns that higher energy costs could fuel inflationary pressures, potentially prompting the ECB to maintain a cautious stance. Money markets continue to price in at least two additional rate cuts by year-end, with the next move fully priced in for September.