Euro Rebounds as Easing Middle East Tensions Boost Risk Appetite

The euro climbed back above $1.14, rebounding from near one-year lows reached last week, as easing tensions between the US and Iran and a sharp decline in oil prices improved risk sentiment. Brent crude retreated from two-month highs, helping ease inflation concerns and prompting money markets to slightly scale back expectations for further European Central Bank tightening, though they still price in nearly two 25-basis-point rate hikes by February 2027. ECB Chief Economist Philip Lane said the current inflation shock remains moderate, warranting some additional policy tightening but not an aggressive response. He also reiterated that inflation is expected to return to the ECB's 2% target over the coming year. Last week, the ECB left interest rates unchanged, as expected, while signaling that another rate hike in September remains possible. Investors now await fresh inflation data later this week for further clues on the policy outlook.

The euro traded below $1.14, near its one-year low reached in June, as investors assessed the ECB's policy outlook and fresh PMI data, while the dollar stayed supported by Middle East risks and new US tariffs. The ECB kept interest rates unchanged as expected but signaled that a September rate hike is becoming increasingly likely. Rising energy prices, with oil nearing $100 per barrel and natural gas prices surging amid the US-Iran conflict, have reinforced inflation concerns and expectations for further tightening after the summer. Several policymakers, including Bundesbank President Joachim Nagel, also warned that inflation risks remain elevated and further rate increases may be needed. Meanwhile, the S&P Global survey showed Eurozone business activity returned to growth in July, beating forecasts. The US also imposed new tariffs on imports from 60 trading partners, including the EU, with the European Commission saying the measures were broadly in line with the EU-US trade agreement.

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.