The Euro has strengthened significantly against the US Dollar, with EUR/USD rallying toward the 1.17 level. According to Chang Wei Liang at DBS Group Research, the Euro is the main beneficiary of recent US Dollar weakness [1]. The July Eurozone Consumer Price Index (CPI) data matched market expectations, with headline inflation at 2.9% year-over-year and core inflation at 2.5% year-over-year [1].
This in-line inflation data has reinforced market conviction that the European Central Bank (ECB) will raise interest rates in September. Markets are currently pricing in a 26 basis point hike, with an implied probability exceeding 90% [1]. The strong inflation figures and high probability of an ECB rate hike have contributed to the Euro's rally.
In contrast, the outlook for the US Federal Reserve's next rate move is less certain, due to recent softness in US economic data and the upcoming mid-term elections in November [1]. This uncertainty has further supported the Euro's gains against the Dollar.
CONCLUSION
The Euro's rally is underpinned by robust Eurozone inflation data and strong market expectations for an ECB rate hike in September. With the US Dollar facing headwinds from economic uncertainty, the Euro remains well-supported in the near term.