Euro Remains Close to Three-Month Highs

The euro held just above $1.165 in the final full week of August, sustaining its highest level since mid-May, as investors braced for a more hawkish European Central Bank amid geopolitical tensions complicating its inflation battle. The ECB is widely expected to raise interest rates in September, following its June tightening to curb inflation pressures triggered by the US-Iran conflict and its impact on energy prices. Oil remains above $90 per barrel, with risks of further supply constraints for refined fuels, low Eurozone gas inventories, and a prolonged conflict that could extend beyond the US midterm elections in November. These risks have fueled expectations of further ECB rate hikes. Money markets are now pricing in more than 40 basis points of additional ECB tightening this year, with the first hike fully priced as early as next month. Meanwhile, data on Tuesday showed German GDP grew 0.3% in Q2 2026, up from the preliminary 0.2% estimate.

The euro held above $1.165 in the final full week of August, its strongest since mid-May, as investors anticipate a more hawkish ECB amid geopolitical tensions and await details on Iran sanctions. The ECB is widely expected to raise interest rates in September, following its June tightening to curb inflation pressures triggered by the US-Iran conflict and its impact on energy prices. Oil remains above $90 per barrel, with risks of further supply constraints for refined fuels, low gas inventories, and a prolonged conflict that could extend beyond November's US midterm elections. A September hike would lift the deposit rate to 2.5%, but bets on further tightening are rising. Markets see a 25% chance of 3% by March 2027 and 60% by September. Meanwhile, US Treasury Secretary Scott Bessent will hold a press conference after threatening "the toughest sanctions in history" on Iran, with markets watching for potential China targets. Iran’s foreign minister dismissed the sanctions as desperate.

The euro strengthened above $1.170, reaching its highest level since May, boosted by improving European economic data and a weaker US dollar. Eurozone business activity continued to expand in August, with manufacturing showing a marked improvement, particularly in Germany, while services growth remained modest. The currency also benefited from a softer dollar following the US Treasury’s decision to increase its bond buyback programme, which pushed long-term Treasury yields lower and weighed on the greenback. Meanwhile, Eurozone consumers slightly lowered their inflation expectations, with anticipated price growth over the next year falling to 2.9% from 3% in June. However, inflation remains well above the ECB’s 2% target, keeping expectations of further monetary tightening alive following June’s rate increase. Investors are also assessing recent volatility in global bond markets, where concerns over persistent inflation and high government spending have pushed yields higher.