The Euro (EUR) rallied sharply against the US Dollar (USD) on Friday, with the EUR/USD pair erasing all losses from earlier in the week and trading near 1.1580, its highest level since June 17 [1]. This surge was driven by broad-based weakness in the US Dollar, as recent US economic data reduced expectations for a near-term Federal Reserve (Fed) interest-rate hike [1]. The US Dollar Index (DXY) fell to around 99.50, down 0.47% on the day [1].
Key data points contributing to the Dollar's decline included a 0.6% drop in US Retail Sales for July, missing expectations for a 0.1% increase and reversing the previous month's 0.2% gain [1]. Additionally, preliminary University of Michigan data showed the Consumer Sentiment Index fell to 51.0 in August from 55.2, and the Consumer Expectations Index dropped to 50.6 from 55.4 [1]. Recent Consumer Price Index (CPI) and Producer Price Index (PPI) reports also indicated that price pressures eased for a second consecutive month, suggesting the inflationary impact of the recent energy shock is fading [1].
Market expectations for Fed policy shifted significantly, with the CME FedWatch Tool indicating a 70% chance that the Fed will keep interest rates unchanged in September, a sharp reversal from earlier expectations of a hike [1]. However, inflation risks remain, as uncertainty over the reopening of the Strait of Hormuz keeps oil prices elevated. The Michigan survey’s one-year inflation expectation edged up to 4.3% from 4.2%, while the five-year measure held steady at 3.3% [1].
On the European side, markets widely expect the European Central Bank (ECB) to raise interest rates in September, which would be its second hike this year [1]. Economists at Commerzbank anticipate the ECB’s September move will bring the deposit rate to 2.5%, a level seen as the upper limit of the neutral interest rate by Governing Council members [1]. Looking ahead, Commerzbank projects that the ECB may begin lowering rates toward the end of 2027 as inflation is expected to gradually decline and approach the target over the coming year [1].
CONCLUSION
The Euro's rally reflects shifting market sentiment as weak US data and easing inflation reduce expectations for a Fed rate hike, while the ECB is poised for another increase. Market participants are now focused on upcoming central bank decisions and inflation trends, with the Euro benefiting from the current policy divergence.