Euro above $1.15 as Fed and ECB expected to ease at different paces

The euro traded above $1.15 in early August, staging a recovery from a recent seven-week low of $1.139, as diverging monetary policy outlooks between the Federal Reserve and the European Central Bank (ECB) began to shift market sentiment.

The euro’s rebound reflects growing expectations that while both central banks are preparing to ease policy in response to slowing growth, the Federal Reserve is likely to act sooner and with greater urgency than its European counterpart.

A weaker-than-expected US nonfarm payrolls report for July — alongside sharp downward revisions to May and June employment data — reinforced investor expectations for an initial Fed rate cut as early as September. Markets are now pricing in at least two cuts by the end of the year, totaling over 60 basis points of easing.

The softening labor data, combined with moderating inflation pressures and signs of weakening consumer confidence, has added urgency to the Fed’s potential pivot toward more accommodative policy.

In contrast, expectations for ECB action remain more measured. Money markets currently reflect a roughly 60% probability of a rate cut by December, rising to 80% by March 2026. However, ECB policymakers have so far adopted a cautious tone, emphasizing a data-dependent approach. Officials are closely monitoring the economic fallout from newly announced US tariffs — particularly on European industrial goods — as well as the overall resilience of inflation dynamics across the bloc.

Recent Eurozone data showed annual inflation holding steady at 2.0% in July, slightly above consensus forecasts of 1.9% and marking the second consecutive month at the ECB’s medium-term target.

Core inflation also remained sticky, suggesting that while price pressures have broadly normalized compared to the 2022–2023 highs, the case for immediate easing is not yet clear-cut. The ECB may therefore prefer to delay rate adjustments until there is more definitive evidence of economic softening or labor market slack.

From a currency markets perspective, the relative pace and scale of policy divergence have reintroduced upward momentum to the euro. As US yields retreat in anticipation of looser monetary policy, the dollar has come under pressure, making the euro more attractive in comparative terms.

This dynamic is further reinforced by the euro area’s current account surplus, which has rebounded thanks to lower energy import costs and improved goods trade balances, particularly with non-EU markets.

Nevertheless, upside risks to the euro remain tempered by broader uncertainties. Continued geopolitical tensions, sluggish growth in Germany and Italy, and the possibility of political fragmentation in key member states could all weigh on investor confidence. Additionally, any signs of a more hawkish shift in ECB language — or stronger-than-expected inflation prints — could delay the expected easing cycle and introduce volatility into euro-dollar dynamics.

In the coming weeks, attention will be focused on a slate of critical indicators including Eurozone GDP revisions, US CPI and PPI releases, and comments from Jackson Hole central bank symposium participants, all of which could reshape expectations for the transatlantic policy trajectory — and, by extension, the path of the euro.