Euro Holds Near Mid-May High as Traders Assess ECB Rate Outlook

The euro traded around $1.165, near its highest level since mid-May, as investors assessed falling oil prices and the outlook for European Central Bank interest rates. Iran said it had resumed talks with Oman on managing the Strait of Hormuz, boosting hopes that the key waterway could reopen and ease disruptions to energy shipments. Meanwhile, Reuters reported that ECB policymakers are prepared to raise rates at their September meeting to contain the economic fallout from the Iran war, but are reluctant to signal further tightening thereafter. Separately, ECB board member Isabel Schnabel said rates may need to rise further if the Middle East conflict persists, citing upside risks to inflation from the resilient euro-area economy. Money markets are pricing less than 40 bps of additional ECB tightening by year-end, with a September rate hike nearly fully priced in.

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 elevated, 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.