The Euro experienced an upward trend in early August, surpassing $1.16 after hitting a seven-week low. This rally is attributed to market anticipation of monetary policy easing from both the US Federal Reserve and the European Central Bank (ECB). Expectations are centered around the Fed implementing more aggressive rate cuts compared to the ECB, fueled by recent weak US employment data.
- The Euro traded above $1.16 in early August, rebounding from a low of $1.139.
- Markets expect easing from both the Federal Reserve and the ECB.
- The Fed is expected to ease faster and more aggressively than the ECB.
- Weaker-than-expected US July payrolls intensified expectations of a Fed rate cut as early as September.
- Money markets are pricing in a roughly 60% probability of an ECB rate cut by the end of the year, rising to 80% by March 2026.
- Eurozone annual inflation held at 2.0% in July, slightly above the 1.9% forecast.
The currency is being influenced by expectations of central bank actions on both sides of the Atlantic. Specifically, the prospect of more aggressive easing in the US is weakening the dollar, thereby strengthening the euro. However, the potential for the ECB to also cut rates caps the currency’s upside potential, as the central bank is watching to see the impact of US tariffs. Inflation rates are within the central bank’s target, implying that there is no immediate pressure on them to raise interest rates.