The euro traded at $1.15745 against the dollar on Tuesday, reflecting a decline of 0.06% during the session, following a retreat below the 1.1600 threshold during Asian hours. That signifies the third consecutive session in which the pair has approached the figure and failed to close above it. The rejection sits directly atop a genuine advance. EUR/USD closed Friday, August 14 at 1.1570, up from 1.1521 the previous week, and reached an intraday high of 1.16 — the highest level observed since June 2026. The pair has appreciated by 1.39% over the past month and 1.01% over the trailing four weeks, rebounding from a low of 1.1355 on June 24, which represented the nadir of the summer range. Over the course of the past twelve months, the euro has experienced a decline of 0.59%. The 52-week range spans from 1.1325 to 1.2079, encompassing a 754-pip band. EUR/USD opened 2026 at 1.1721 and reached a four-and-a-half-year high exceeding 1.20 in late January, prior to the US-Iran conflict challenging all underlying assumptions related to the pair. Tuesday’s pullback affected the entire complex. Sterling declined by 0.14% to $1.35298, slipping beneath the 1.3600 threshold as the UK labour market data showed signs of weakening. The dollar appreciated by 0.20% against the yen, reaching 159.638, marking a peak not seen in over two weeks. The Australian dollar experienced a decline of 0.06%, settling at 0.71024, which is below the 0.7100 threshold. USD/CAD ascended past the 1.3800 mark, reaching 1.38673. Meanwhile, USD/TRY achieved a historic peak at 47.9186.
That breadth is significant. When all major pairs exhibit movement in the same direction within a single session, it indicates that the driving force is on the dollar side rather than the euro side. The catalyst was Brent crude reaching approximately $91.76 per barrel and the 30-year Treasury yield printing 5.323%, the highest since 2007 — a combination that revives the inflation premium and the dollar’s carry simultaneously. European equities validated the prevailing risk sentiment. The pan-European Stoxx 600 experienced a decline of 0.51%, while France’s CAC 40 recorded a loss of 0.55%. Italy’s FTSE MIB saw a drop of 0.59%, and Germany’s DAX decreased by 0.38%. In contrast, the FTSE 100 remained nearly unchanged, with a slight decrease of less than 0.1%. The euro faces a significant challenge as it is expected to strengthen based on a narrative of policy convergence, even as the commodity that influences eurozone inflation is priced at $91.76, necessitating a response from the currency’s central bank. The week of August 10 to 14 presented a dual perspective on US inflation, alongside a net appreciation for the euro. Wednesday’s subdued CPI report exerted downward pressure on the dollar, while simultaneously propelling gold to a ten-week peak. Thursday’s stronger core PPI partially reversed previous trends, rekindling expectations for a September rate hike and causing the precious metals complex to retreat from its recent highs. EUR/USD closed the week at 1.1570, up from 1.1521 the previous Friday, marking a gain of 49 pips, or 0.43%. Brent experienced an increase of over 7% during that week, as discussions between Iran and Oman regarding the reopening of the Strait of Hormuz faced delays, while Washington indicated a shift toward more stringent actions against Tehran. Crude concluded trading on Friday at $88.60 and has subsequently increased by $3.16, attaining a value of $91.76 by Tuesday. That is the most critical figure in this analysis, and it operates to the detriment of the euro.
The euro maintained its position close to two-month highs as the dollar remained on the defensive. Softer US data — July retail sales decreased by 0.6% compared to an anticipated increase of 0.1%, while the University of Michigan sentiment index fell to 51.0 from 55.2. Additionally, the tame July CPI had a more detrimental effect on the dollar than the oil movement had on the euro. The market opted for the Fed repricing rather than the energy transmission. The structural backdrop underpins that choice. The ECB maintained rates at 2.25% in July after the increase in June, and the second-quarter eurozone GDP growth of 0.4% supports a constructive outlook rather than one of recession. Money markets have adjusted expectations for the ECB deposit rate, now forecasting it to reach 2.75% by early 2027. This suggests the likelihood of two additional rate hikes, with the initial increase possibly occurring at the meeting on September 10. The pair currently resides within a base case of 1.1400 to 1.1750, which has effectively contained it throughout August. It has spent the month steadily ascending within that range without generating a clear directional break, and the upcoming week’s schedule is poised to compel one. Wednesday presents the final Consumer Price Index for the eurozone, the Producer Price Index for Germany, and the minutes from the Federal Open Market Committee. On Friday, market participants will receive preliminary Purchasing Managers’ Index (PMI) data for the US, eurozone, and UK, alongside the Philadelphia Fed index and jobless claims figures. Additionally, the Jackson Hole symposium will commence, featuring remarks from Fed Chair Kevin Warsh.
The mechanical driver of every sustained EUR/USD move is the policy rate gap, and that gap is shrinking for the first time in two years. The Federal Reserve maintains the funds rate within the range of 3.50% to 3.75%. The ECB maintains its deposit facility rate at 2.25%. At midpoints, the nominal differential is positioned at 137.5 basis points in favour of the dollar, reflecting a range of 125 to 150 basis points contingent upon the specific endpoint of the Fed corridor utilised. The market is currently reflecting expectations of two European rate increases in contrast to approximately one American rate increase. Money markets are anticipating that the ECB deposit rate will reach 2.75% by early 2027, with intermediate projections of 2.70% by December and a range of 2.76% to 2.78% by the first quarter of 2027. On the US side, the likelihood of a rate hike in September has diminished to approximately 35%, down from nearly 50% prior to last week’s data, while the probability of maintaining the current rate stands at 69.9%. Markets no longer fully incorporate any potential US increase by year-end. Proceed with the calculations in a progressive manner.
If the ECB implements two increases of 25 basis points each and the Fed enacts one, the differential narrows from 137.5 to 112.5 basis points. If the ECB implements two rate hikes while the Fed opts for none, the result would be a reduction to 87.5 basis points. That represents a 50 basis point compression from current levels, and historically, a 50 basis point differential compression underpins a 300 to 500 pip movement in EUR/USD. The configuration is unusual and merits explicit mention: both central banks are inclined toward tightening rather than easing. Currency markets seldom experience such occurrences. It indicates that the pair is reflecting the comparative speed of two hiking cycles, rather than the traditional divergence between one easing and one tightening central bank. That is also the reason for the gradual pace of the move. Convergence trades exhibit a grinding behaviour, while divergence trades demonstrate a trending nature. The euro’s rise from 1.1355 on June 24 to 1.1600 in mid-August represents a movement of 245 pips over eight weeks, equating to a 2.2% increase. This reflects a gradual market pricing adjustment rather than a complete repositioning. The June Fed projections indicated that nine out of eighteen policymakers anticipated at least one additional increase prior to the conclusion of 2026. That division is what Wednesday’s minutes will elucidate.
