Euro Rises Ahead of ECB Decision

The euro edged up to $1.164, its strongest level since late August, as investors positioned ahead of Thursday’s European Central Bank policy meeting. Policymakers are widely expected to raise interest rates while maintaining their data-dependent stance, with the ongoing war involving Iran adding to uncertainty around the inflation outlook. Brent crude briefly hit $100 a barrel for the first time since July 24, while European natural gas prices climbed to fresh three-and-a-half-year highs, as escalating tensions in the Middle East have heightened concerns over energy supplies. Markets are now pricing in two ECB rate hikes in 2026, with the deposit rate expected to reach 3% by late 2027. A Reuters poll published on September 3 showed economists expected the ECB to raise rates on Thursday for a second time, before bringing what would be its shortest rate-hiking cycle in 15 years to an end.

The euro stabilized around $1.16 as investors looked ahead to the European Central Bank’s policy meeting later this week, while rising oil prices added to inflation concerns. Brent crude approached $100 a barrel, while European natural gas prices rose to their highest level since late 2022 amid renewed tensions in the Middle East and reports that Iran and Oman were close to an agreement on managing shipping through the Strait of Hormuz, heightening concerns over Tehran’s growing influence over the key waterway. Persistent inflation pressures and resilient economic growth are keeping central banks under pressure to maintain a restrictive policy stance. The ECB is widely expected to raise interest rates on Thursday, with markets almost fully pricing in another hike by year-end. In the US, investors are awaiting key inflation data later this week, after Friday’s strong jobs report lifted the probability of a Fed rate hike next week to nearly 60%, providing further support for the dollar.

The euro was little changed just above $1.16 as investors digested the far-right AfD’s victory in Saxony-Anhalt and looked ahead to the European Central Bank’s policy meeting later this week, with higher oil prices adding to inflation concerns. The AfD won 44% of the vote, falling short of an overall majority but delivering a major blow to Chancellor Friedrich Merz’s conservatives. Meanwhile, Brent crude moved closer to seven-week highs after the US struck three Iranian oil tankers over the weekend, destroying one, while Tehran threatened to establish a new restricted zone outside the Strait of Hormuz. The ECB is expected to raise interest rates on Thursday, erring on the side of caution as the US-Iran war drags on, keeping oil prices elevated and reviving inflationary pressures. Traders are also pricing in roughly a 90% probability of a second rate hike by the end of the year.