During Wednesday's Asian trading session, the euro edged higher against the US dollar, hovering near the 1.1580 mark. Soft US inflation, employment, and retail sales figures have continued to dampen expectations for a Federal Reserve rate hike in September, putting pressure on the greenback. Meanwhile, European Central Bank Chief Economist Philip Lane noted that the eurozone's 3% inflation rate remains excessively high, reinforcing market expectations for further ECB tightening—with the probability of a September hike pegged at 90%-94%. Germany's August ZEW economic sentiment index also surpassed forecasts, offering additional support to the common currency. However, ongoing US-Iran tensions and cautious remarks from ECB officials have limited the euro's upside potential, with markets now focused on ECB President Christine Lagarde's speech scheduled for later Wednesday.
US Data Weakens Across the Board, September Hike Odds Slip Below 40%
A string of disappointing US economic releases over recent weeks—including an unexpected decline in July nonfarm payrolls, modest consumer price inflation, and soft retail sales—has prompted investors to significantly scale back bets on a September Fed rate increase. Surveys from major institutions indicate that a majority of economists now expect the Fed to hold rates steady at its September meeting and maintain that stance through year-end. According to the CME FedWatch Tool, the probability of the Fed keeping rates unchanged in September stands at 65%, while the odds of a 25-basis-point hike have fallen to just 35%.
Geopolitical factors, however, could provide a floor for the dollar. With the US-Iran conflict entering its sixth month, President Trump has indicated no intention of extending the soon-to-expire peace agreement with Tehran. On Tuesday, he explicitly stated there are "no negotiations or dialogue arrangements" with Iran, adding that the naval blockade remains fully in effect. As long as geopolitical risks persist, the dollar will retain its safe-haven bid, making it difficult for the euro to sustain any meaningful rally.
Euro's Triple Support: Sticky Inflation, Strong ZEW Reading, and Solid ECB Tightening Expectations
In the eurozone, expectations for further ECB rate increases continue to underpin the euro. Financial markets are pricing in continued tightening by the central bank—the ECB Watch tool shows a 90%-94% probability of a 25-basis-point hike to 2.50% at the September 9 meeting. ECB Chief Economist Philip Lane said Tuesday that the eurozone's 3% inflation rate remains too high, even though it appears moderate compared with previous levels. His comments align with market expectations that the ECB will maintain its restrictive policy stance.
German economic data have provided additional fundamental support for the euro. The August ZEW economic sentiment index's expectations component rose to 34, beating both the market consensus of 30 and July's reading of 26.3, reflecting improved analyst sentiment toward Germany's economic outlook. Strategists at Scotiabank noted that while the recovery remains sluggish, the improvement in German survey data is helping the euro maintain its resilience.
That said, Lane's language carried a degree of caution. His emphasis on a "meeting-by-meeting, data-dependent" approach and a "more reactive" policy role suggests a relatively dovish stance, tempering market expectations for aggressive ECB tightening. Overall, the combination of improved growth confidence and reactive policy guidance supports a narrative of gradual normalization rather than another round of aggressive tightening, leaving euro traders cautious about adding to bullish positions.
Institutional Views
Bank of America, in its latest research note, expects the euro to remain under pressure against the dollar through the end of the third quarter, driven by robust US economic data and a relatively hawkish Fed stance. Near-term oil price gains should also provide additional support for the dollar. The bank believes the growth divergence between the US and the eurozone will peak in the coming months, after which the eurozone—bolstered by German fiscal stimulus and falling energy prices—could improve, supporting a gradual euro recovery. However, until Fed rate hike expectations are fully priced in and oil prices retreat, the dollar is likely to remain relatively strong, limiting the euro's upside.
Francesco Pesole, FX strategist at ING, notes that EUR/USD is starting to look slightly undervalued around the 1.1570 level. The bank's short-term fair value model places the euro's fair range at 1.1600-1.1650, roughly 30-80 basis points above current levels. The primary driver stems from shifts in relative interest rates, with the two-year swap spread having narrowed by about 10 basis points—sufficient to support the bank's constructive stance. ING believes that although the euro has rebounded from its July lows and reclaimed the 1.15 level, there is a lack of clear catalysts to break above 1.1600 in the near term, unless the Fed delivers a surprise dovish pivot. Ahead of the Jackson Hole symposium, if more centrist officials soften their hawkish rhetoric, it could open the door for further euro gains.
Summary
The continued cooling of Fed rate hike expectations, coupled with the ECB's relatively hawkish policy outlook, provides rate-differential support for the euro. Germany's better-than-expected ZEW data has injected fundamental confidence into the single currency, but the US-Iran conflict could boost safe-haven demand for the dollar, and the ECB Chief Economist's cautious language also limits the euro's upside. In the near term, the euro is likely to trade in a 1.1550-1.1620 range, awaiting further clarity on the policy paths of both the Fed and the ECB. As of 12:03 Beijing time on August 19, EUR/USD was trading at 1.1581/82.
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