Euro advances as US Dollar weakens amid cooling US Inflation
- EUR/USD gains as US Dollar struggles amid moderating US July inflation, reducing September Fed rate hike bets.
- Stalled US-Iran nuclear talks over Gulf conflict resolution may limit upside gains for EUR/USD.
- Stronger Q2 Eurozone 0.4% growth and 2.9% inflation keep a 25bps September ECB hike likely.
EUR/USD halts its three-day losing streak, trading around 1.1530 during the Asian hours on Thursday. The currency pair gains ground as the US Dollar (USD) faces challenges following the release of July's Consumer Price Index (CPI) report. Inflation in the United States moderated across a broad range of goods and services, which significantly cooled expectations for an aggressive Federal Reserve rate hike in September.
According to data released by the Bureau of Labor Statistics, the headline CPI increased 3.4% year-over-year in July, down from 3.5% previously. Similarly, core CPI, which excludes volatile food and energy costs, rose 2.5% year-over-year compared to 2.6% in June. Both readings matched market expectations.
US inflation in line with expectations as energy and food pressures ease
According to TD Securities, July US consumer price inflation "matched expectations," with the headline CPI rising "0.1% m/m (0.074% before rounding; TD: 0.15%, consensus: 0.1%)." The strategists note that the modest increase was "partly explained by still retreating energy prices (gasoline -3% m/m) and slowing food inflation," underscoring the role of softer fuel and food costs in keeping overall price pressures contained.
In light of the new inflation data, market expectations for future Fed policy shifts have adjusted. According to the CME FedWatch tool, interest-rate swaps are now pricing in roughly a 40.1% chance of a rate hike in September. Odds for an October move fell to about 60% from 75% the previous day, with the next potential rate increase not fully priced in until December.
However, upside momentum for the risk-sensitive EUR/USD pair may remain constrained by escalating geopolitical tensions between the US and Iran. A senior Iranian official noted that Washington and Tehran remain at loggerheads over a permanent end to conflicts in the Gulf, reporting zero progress in reviving the interim deal or establishing an implementation timeline.
Meanwhile, the macroeconomic picture in the Eurozone continues to support the European Central Bank's (ECB) hawkish stance. Market-based inflation expectations for the Euro Area over the next year sit around 2.4%, remaining above the ECB’s official 2% target, while actual Eurozone inflation edged up to 2.9% in July. Coupled with a resilient economic outlook, highlighted by a 0.4% expansion in Q2, the strongest pace since early 2025, analysts have grown increasingly optimistic about the region's growth. Although near-term growth may moderate before regaining momentum, investors fully expect the ECB to deliver another 25-basis-point rate hike in September.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
