Euro Slides as Safe-Haven Dollar Gains on Mideast Risks

Key Moments

Dollar Demand Rises as Geopolitics Rattle Risk Appetite

EUR/USD extends its decline for the second consecutive day, with the pair trading around 1.1520 during Asian dealings on Friday. The move reflects renewed strength in the US Dollar (USD) as investors seek safety amid intensifying geopolitical uncertainty.

Market sentiment has been shaken by escalating tensions in the Strait of Hormuz, a key global shipping chokepoint. Confidence about the corridor’s reopening has deteriorated as Iran’s parliament reviews a draft measure that would bar US and Israeli vessels, impose a 20% cargo levy on countries deemed hostile, and keep restrictions in place until a US blockade is lifted.

Oil Rebound, Treasury Yields Stir Fed Policy Concerns

Rising US Treasury yields and a recovery in crude oil prices are adding to the uneasy backdrop. These moves have fueled worries that the Federal Reserve may opt for another interest rate increase next month.

Despite those concerns, market-based expectations have moderated. According to the CME FedWatch Tool, the probability of a 25-basis-point rate hike in September stands at 54.5%, down from 63.4% a week earlier. Participants are now turning their attention to the upcoming July Nonfarm Payrolls (NFP) release, looking for signals on labor market strength and clues on the likely trajectory of Fed policy.

Eurozone Data Undermines Single Currency

On the European side, the macroeconomic picture is providing little support for the Euro. Eurozone Retail Sales unexpectedly declined by 0.3% month-on-month in June, missing forecasts for a 0.1% increase. The drop nearly erased May’s revised 0.4% gain.

On a year-over-year basis, Retail Sales rose just 0.7%, the weakest performance since July 2024. That outcome fell short of expectations for 1.0% growth and represented a sharp slowdown from the 1.9% expansion recorded in May.

The renewed upturn in oil prices further complicates the outlook. Hopes that lower energy costs would relieve pressure on central banks to maintain restrictive policy are being challenged by the latest market moves.

ECB Outlook: Cautious, Data-Dependent, and Alert to Energy Risks

Following the European Central Bank’s (ECB) recent decision to keep interest rates unchanged, markets are currently pricing in only one additional rate hike by year-end, with roughly a 40% probability of a second move.

Comments from ECB’s Kocher underscore the institution’s focus on incoming data and the impact of geopolitical developments on energy and inflation dynamics.

Kocher flags autumn data focus as geopolitical risks cloud Euro inflation

ECB’s Kocher scores 5.6/10 on FXS Speechtracker, below the historic average of 6.3/10, pointing to a slightly less forceful tone than usual. The emphasis on how quickly geopolitical developments can alter energy prices and the inflation outlook highlights upside risks to Euro-area prices, which leans modestly hawkish despite the softer score.

The commitment that in autumn the ECB Governing Council will base decisions on incoming data to bring Euro-area inflation back to 2% on a sustainable basis reinforces a data-dependent but vigilant stance. Overall, the speech suggests a cautious hawkish bias, with Kocher keeping the door open to renewed tightening or a slower easing path if energy-driven inflation pressures re-emerge.