The euro strengthened to around $1.16 on Monday, reaching its highest level in about two months as softer U.S. economic data reduced expectations for additional Federal Reserve tightening while prospects for another European Central Bank rate increase remained elevated. The euro traded as high as roughly $1.1614.
Expectations for a September Fed rate increase have fallen sharply. Recent pricing put the probability at around 30%, down from roughly 50% previously, following weaker U.S. employment, retail sales and inflation data.
The outlook in the euro area has moved in the opposite direction. A Reuters poll published last week found that 83% of economists expected the ECB to raise its deposit rate by 25 basis points to 2.50% in September. The central bank raised rates in June before holding them unchanged in July.
The divergence between the two central banks has provided support for the single currency as expectations for further U.S. monetary tightening recede while another ECB increase remains a possibility.
Energy prices remain an important risk for the euro-area outlook. The ECB has warned that a prolonged conflict in the Middle East could produce a larger and more persistent increase in energy costs, adding to inflation while weighing on economic activity.
Oil prices remained elevated Monday, with Brent crude trading around $89 per barrel amid continuing Middle East tensions and uncertainty surrounding supplies.
Attention now turns to upcoming euro-area economic indicators, including PMI data, for further evidence on business activity and the conditions that could shape the ECB’s September decision.
