Euro climbs above $1.15

The euro traded above $1.16 in early August, rebounding from a recent seven-week low of $1.139, as investors recalibrated their expectations around monetary policy paths for both the Federal Reserve and the European Central Bank (ECB).

While both central banks are signaling a pivot toward easing, the Fed is widely expected to move faster and more decisively, reinforcing the euro's relative strength against the dollar.

The shift in sentiment followed a weaker-than-anticipated US July payrolls report, which not only fell short of consensus expectations but also included substantial downward revisions to job gains in May and June. The labor market softness fueled speculation that the Fed could begin cutting rates as soon as September, with futures markets now pricing in at least two rate cuts by year-end. Additionally, softening inflation indicators and tightening credit conditions in the US have strengthened the case for a policy shift, prompting risk-on flows into the euro.

In contrast, the ECB’s trajectory remains more measured, reflecting a delicate balance between maintaining price stability and responding to a slowing economy. While money markets now price in a 60% probability of an ECB rate cut by December, rising to 80% by March 2026, the central bank continues to signal caution.

Policymakers have emphasized a data-dependent approach, particularly in light of geopolitical uncertainties, including the renewed imposition of US tariffs on Chinese and European goods, which could weigh on export demand and manufacturing sentiment across the Eurozone.

On the inflation front, Eurozone consumer prices rose 2.0% year-on-year in July, slightly above the 1.9% forecast and marking the second consecutive month at the ECB’s inflation target. Core inflation also showed resilience, adding to the ECB’s hesitancy to move aggressively.

However, the region’s tepid growth outlook, along with weakening credit demand and signs of industrial stagnation in Germany and France, could push the ECB toward action in early 2026 if economic conditions deteriorate further.

Overall, the euro’s recent strength reflects not just diverging policy timelines but also growing confidence in the bloc’s relative macroeconomic stability, at least in the near term.