EUR/USD edges higher to around 1.1385 in the early European session on Friday. ECB maintains current interest rates while leaving the possibility for further tightening on the table, thereby bolstering the Euro. The US military executed another series of strikes during the night aimed at Iranian targets. The EUR/USD pair strengthens to approach 1.1385 during the early European trading hours on Friday, supported by the anticipation of forthcoming rate hikes from the European Central Bank. The preliminary readings of the Purchasing Managers Index for July from the Eurozone, Germany, and the US will be the focal points later on Friday.
As anticipated, the ECB opted to maintain the key interest rates at its July policy meeting on Thursday, while signalling the possibility of another rate increase in September, given the recent spike in energy prices that poses a risk of inflation remaining significantly above the 2% target. ECB President Christine Lagarde stated during a press conference that the central bank expects inflation to stay “well above target” until the first half of 2027. Officials maintain a heightened state of vigilance regarding a potential “second-round inflation shock” instigated by the US-Iran conflict, as market participants largely anticipate that interest rate increases will recommence later this year.
Hawkish expectations surrounding the ECB may offer some support to the Euro against the US Dollar in the near term. Markets are currently assigning approximately a 95% probability to a 25-basis-point rate increase by the ECB in September, with a comparable likelihood of an additional adjustment by December, as reported. The US military executed a 13th consecutive night of strikes on Iran, focusing on drone facilities, coastal surveillance sites, and additional targets. US President Donald Trump stated on Thursday that the United States would hold Iran accountable for the actions of the Houthis and cautioned that both Iran and its Houthi allies would soon face a “major military punishment,” according to the Guardian. Escalating tensions in the Middle East may enhance the appeal of a safe-haven currency like the Greenback, potentially presenting challenges for the major pair.
Analysts observe that “in response to rising energy prices, market participants have been moving to price in more hawkish expectations for major central banks including the ECB and Fed resulting in short-term yields rising to fresh year-to-date highs.” They note that “the euro-zone rate market is now pricing in two to three further ECB rate hikes in the year ahead while the US rate market is pricing in around two Fed hikes over the same period.” MUFG adds that “short-term yields have risen more recently in Europe than in the US resulting in yield spreads moving against the USD,” underscoring how the recent repricing has been more pronounced on the Eurozone side of the curve.