Euro Near 2-Month Highs

The euro has been trading around $1.15 in August, near two-month highs, as traders navigate shifting developments in the Middle East and conflicting signals over the prospects of a deal between the US and Iran, while also assessing the resulting rise in oil prices and its impact on inflation. In Europe, market-based measures of inflation expectations, reflected in swaps for the Euro Area over the next year, are around 2.4%, above the ECB’s 2% target. Eurozone inflation edged up to 2.9% in July. Meanwhile, the Euro Area economic outlook has improved, with recent resilience prompting analysts to become more optimistic about growth. The Eurozone economy expanded 0.4% in Q2, the strongest pace since early 2025 and growth is projected to moderate in the near term before gradually gaining momentum. As a result, investors expect the ECB to deliver another 25bps rate hike in September.

The euro remained above $1.155, close to an eight-week high, as investors weighed mixed signals from the US and Iran over the prospects for reopening the Strait of Hormuz. Iran’s Foreign Minister said an agreement with Oman to establish a shipping route through the strait was “very close,” but cautioned that it would not immediately restore shipping flows. Meanwhile, the Euro Area outlook has improved, with recent economic resilience prompting analysts to become more optimistic about growth. Second estimates later this week are expected to confirm the Eurozone economy expanded by 0.4% in Q2, the most since early 2025. Looking ahead, growth is projected to moderate in the near term before gradually gaining momentum. On the monetary policy front, the European Central Bank left interest rates unchanged in July following a 25bps increase in June, its first hike in three years, while expectations of a near-term Federal Reserve rate hike eased.

The euro strengthened above $1.157, reaching its highest level since June 16, as the dollar weakened sharply following a disappointing US jobs report that reduced expectations of further Federal Reserve rate hikes. Meanwhile, easing oil prices reinforced expectations that inflationary pressures in the Euro Area will continue to moderate. Investors also monitored developments surrounding the Strait of Hormuz, with President Donald Trump saying negotiations between Iran and Oman were “moving along,” although no agreement has yet been finalized. A deal on managing the strategic waterway is seen as crucial to restoring energy flows, which have remained below pre-war levels amid continued regional tensions. A reopening could also help pave the way for broader negotiations aimed at ending the conflict. Against this backdrop, the European Central Bank left interest rates unchanged in July after raising its key rate by 25 basis points in June, its first increase in three years.