Euro Weakens as ECB Holds Rates Amid US Dollar Strength

The Euro drops as the ECB maintains interest rates, while tensions in the Middle East bolster the US Dollar, affecting currency markets.

EUR/USD trades around 1.1385 on Thursday following the European Central Bank’s (ECB) decision to keep its key interest rates unchanged, aligning with market expectations. After its July policy meeting, the central bank maintained the main refinancing rate at 2.4%, the marginal lending facility rate at 2.65%, and the deposit facility rate at 2.25%.

In its policy statement, the ECB noted the highly volatile outlook for energy prices and emphasized that the full inflationary impact of the recent energy shocks remains to be seen. The ECB reiterated that monetary policy decisions will continue to be assessed on a meeting-by-meeting basis, taking into account incoming economic data, the inflation outlook, and the strength of monetary policy transmission. The central bank stressed it is not pre-committing to any specific interest rate path.

Despite this policy hold, the Euro remains under pressure against the US Dollar. The Greenback is finding support from renewed safe-haven demand driven by escalating tensions in the Middle East. The US has conducted strikes against Iran for the twelfth consecutive night, prompting Tehran to retaliate by targeting US military bases in Jordan and Bahrain.

Furthermore, tensions in energy markets have intensified. Following disruptions in the Strait of Hormuz, attacks by Yemen’s Ansar Allah on two Saudi oil tankers in the Red Sea are now threatening shipping traffic through the Bab el-Mandeb Strait. Currently, West Texas Intermediate (WTI) US Oil trades around $89.50 per barrel, marking a roughly 28% increase this month.

Soaring energy prices are elevating inflation concerns in the United States, leading to heightened expectations that the Federal Reserve may consider tightening monetary policy. According to the CME FedWatch Tool, the market is currently pricing in a 78% chance of a rate hike during the September meeting, up from 52% just one week ago.

The US Dollar is further strengthened by remarks from US Secretary of State Marco Rubio, who indicated that military strikes against Iran may escalate as long as Tehran continues to refuse negotiation, while also calling on the Houthis to cease their attacks. This ongoing geopolitical uncertainty continues to fuel safe-haven flows into the US Dollar, making it difficult for EUR/USD to rebound.

As the day progresses, EUR/USD remains under heavy bearish pressure, trading at its lowest level in three weeks below 1.1370. The cautious tone from the ECB regarding interest rate hikes in the near future, coupled with the broad-based strength of the US Dollar against risk-averse sentiments, drags the currency pair lower.

Gold is also feeling the impact, retreating on Thursday and trading well below $4,100 early in the American session. Likewise, US crude oil prices have surged to a fresh six-week high above $90, amid escalating tensions between the US and Iran, which are further fueling inflation fears and bolstering Fed interest rate hike expectations.

Meanwhile, Bitcoin is experiencing a correction, trading below $65,800 after a slight decline on the previous day. Despite the downturn in BTC, US-listed spot Bitcoin Exchange-Traded Funds have continued to attract institutional inflows for the seventh consecutive day.