The euro slipped 0.06% to $1.15745 on Tuesday after failing to sustain gains above the 1.1600 level during Asian trading, marking the third consecutive session the pair approached but failed to close above the threshold.
The pair has advanced 1.39% over the past month and 1.01% over the trailing four weeks, recovering from a June 24 low of 1.1355 that defined the summer trading range. Over the past 12 months, however, the euro remains down 0.59%. The 52-week range spans 1.1325 to 1.2079, a 754-pip band. EUR/USD opened 2026 at 1.1721 and briefly traded above 1.20 in late January amid heightened geopolitical tensions.
Tuesday’s pullback extended across major currency pairs, with sterling down 0.14% to $1.35298, the dollar rising 0.20% against the yen to 159.638, and the Australian dollar slipping 0.06% to 0.71024. USD/CAD climbed above 1.3800 to 1.38673, while USD/TRY hit a record high at 47.9186. The broad dollar strength suggests the move was driven by U.S. factors rather than euro-specific dynamics.
The catalyst for the dollar’s rebound was the surge in Brent crude to approximately $91.76 per barrel and the 10-year U.S. Treasury yield rising to 5.323%, its highest since 2007. The combination revived inflation concerns and supported the dollar’s safe-haven appeal, undermining the euro’s policy convergence trade.
European equities reflected the risk-off tone, with the Stoxx 600 down 0.51%, CAC 40 falling 0.55%, FTSE MIB dropping 0.59%, and DAX shedding 0.38%. The FTSE 100 remained nearly flat, down less than 0.1%.
The euro’s advance has occurred despite rising energy costs, which pose a direct challenge to the European Central Bank’s inflation mandate. Brent crude, now at $91.76, closed Friday at $88.60 and has added $3.16 since, extending gains from a week earlier when stalled Iran-Oman talks and U.S. sanctions threats on Tehran fueled supply concerns.
The ECB held its deposit facility rate at 2.25% in July following a 25-basis-point hike in June, while the Federal Reserve maintained its funds rate at 3.50%-3.75%. Money markets price the ECB to deliver two additional hikes by early 2027, with the first potentially at the September 10 meeting. The policy rate differential between the ECB and Fed has narrowed to 137.5 basis points at midpoints, down from a two-year high, as U.S. rate-hike odds have diminished.
Markets now assign roughly 35% probability to a September Fed hike, with a 69.9% chance of a hold. If the ECB delivers two 25-basis-point increases and the Fed delivers one, the differential would compress to 112.5 basis points. If the Fed delivers no hikes, the gap could fall to 87.5 basis points—a 50-basis-point compression historically associated with a 300- to 500-pip move in EUR/USD.
The ECB’s September decision remains highly sensitive to oil prices. Market pricing for a 25-basis-point hike on September 10 has fluctuated between 70% and 90%, with the latest readings above 84%. ECB President Christine Lagarde has emphasized that inflation is expected to remain above target until at least the first half of 2027, with elevated energy prices posing a risk of second-round inflation effects.
The pair has traded within a 1.1400 to 1.1750 range throughout August, grinding higher without a decisive breakout. Upcoming data releases, including eurozone final CPI and U.S. FOMC minutes on Wednesday, followed by flash PMIs and Jackson Hole remarks on Friday, may force a directional move.
The structural backdrop remains mixed: eurozone GDP growth of 0.4% in the second quarter supports a constructive outlook, while the ECB’s growth forecast for 2026 sits near 0.8%. Convergence trades, such as the current EUR/USD dynamic, typically unfold gradually rather than in sharp moves.
