Euro remains close to four-year high amid renewed trade optimism

The euro traded above $1.17, holding near its strongest level since August 2021, as growing optimism surrounding a potential trade agreement between the United States and the European Union buoyed sentiment.

The upbeat mood followed the announcement of a trade deal between the US and Japan, which raised hopes that similar progress could be achieved between Washington and Brussels. However, investor caution persisted amid signs of friction in the ongoing tariff negotiations.

Reports indicated that the EU is preparing a set of retaliatory measures should talks falter ahead of the critical August 1 deadline, signaling that a breakdown in discussions could quickly escalate into a broader trade conflict.

At the same time, attention has shifted to upcoming economic events in the eurozone, particularly the European Central Bank's policy decision on Thursday and the release of flash Purchasing Managers’ Index (PMI) data from the region's largest economies, including Germany and France. These indicators are expected to provide further insight into the eurozone’s fragile recovery and the ECB’s future rate trajectory.

The central bank is widely expected to leave interest rates unchanged after executing eight consecutive rate cuts since mid-2024. Policymakers face the delicate task of balancing soft domestic growth and subdued inflation against external headwinds — most notably, the potential drag from stronger-than-expected US tariffs and the euro’s sharp appreciation, which could dampen export competitiveness and weigh on the bloc's manufacturing sector.

While inflation in the euro area remains below target, the ECB appears to be in a wait-and-see mode, wary of acting too aggressively as financial conditions tighten globally. Money markets are currently fully pricing in a 25 basis point cut by December, with a roughly 50% probability of it occurring as early as September, depending on incoming data and global trade developments.

In the meantime, the euro’s strength reflects not only improved trade sentiment but also a divergence in growth and policy expectations between the US and Europe. If the EU and US can reach a trade resolution in the coming weeks, the euro may find further support — but any signs of negotiation breakdown could quickly reverse gains and heighten volatility across foreign exchange markets.