The euro held below $1.13, hovering near its weakest level since May 2025, despite Eurozone inflation coming in stronger than expected. Annual inflation accelerated to 3.8% last month, its highest reading since September 2023 and significantly above the ECB’s 2% target, driven largely by higher fuel costs.
Even with this renewed inflationary pressure, the single currency remains under strain as markets continue to expect the ECB to tighten policy more slowly than the US Federal Reserve. Investors still anticipate additional ECB rate hikes over the next year, with the next increase potentially as soon as December.
ECB Executive Board member Isabel Schnabel said on Wednesday that the coming months will be crucial for assessing the impact of the energy shock and determining how far interest rates will need to rise. Her remarks underscore a cautious, wait-and-see stance as the US-Iran conflict enters its eighth month.
At the same time, the eurozone’s subdued growth outlook is likely to constrain the scope for aggressive tightening. GDP is projected to expand by just 0.9% this year, limiting the ECB’s room to maneuver.
