The EUR/USD currency pair trimmed earlier gains on Monday, falling back below the 1.1600 level as the US Dollar (USD) showed signs of stabilization after opening the week under selling pressure. At the time of writing, EUR/USD traded around 1.1580, having reached an intraday high of 1.1614, its highest level since June 17 [1]. The US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, traded near 99.57 after touching 99.30, its weakest point since June 5 [1].
The recent moves in the currency markets are attributed to fading expectations of an imminent Federal Reserve (Fed) rate hike and ongoing geopolitical tensions in the Middle East, which have maintained some defensive demand for the USD and limited its downside [1]. According to the CME FedWatch tool, traders now assign around a 70% probability that the Fed will keep interest rates unchanged at its September meeting [1]. This shift in expectations follows recent US economic data indicating weaker labor demand, softer consumer spending, and easing inflationary pressures [1].
In contrast, the European Central Bank (ECB) is widely expected to raise interest rates for the second time this year in September as policymakers aim to bring inflation back toward the 2% target [1]. The expiration of a 60-day memorandum of understanding between the United States and Iran without a permanent agreement, along with continued restrictions on shipping through the Strait, has kept energy-driven inflation risks alive [1]. This environment supports expectations of an ECB rate hike in September while preventing markets from fully ruling out a Fed hike later this year [1].
Looking ahead, markets are focused on the final Eurozone Harmonized Index of Consumer Prices (HICP) data for July, due on Wednesday, with core HICP inflation expected to be confirmed at 2.5% year-over-year [1]. In the US, traders will also scrutinize the Minutes of the July Federal Open Market Committee (FOMC) meeting, also due on Wednesday, for further insights into the Fed’s policy outlook [1].
CONCLUSION
The Euro's retreat below 1.1600 reflects shifting expectations around central bank policy, with markets now seeing a high probability of the Fed holding rates steady while anticipating another ECB hike in September. Upcoming inflation data and FOMC minutes are likely to provide further direction for currency markets. Geopolitical risks and energy-driven inflation remain key factors influencing sentiment.