The euro has plummeted to its lowest level in over a year against the dollar, falling 2.6% this month to $1.135, a significant departure from Wall Street's earlier expectations of it reaching $1.20. This decline is largely attributed to the US-Iran deal restoring oil flows through the Strait of Hormuz, which has alleviated inflationary pressures and reduced the likelihood of further interest rate hikes by the European Central Bank (ECB). Additionally, recent economic data pointing to a slowdown in the Eurozone, exacerbated by a period of high energy prices, has made investors wary of re-entering bullish euro positions.
Several prominent financial institutions have revised their euro forecasts downwards. JPMorgan, for instance, has lowered its euro target from $1.13 to $1.10, citing a combination of stabilizing growth, persistent inflation, and the exceptional performance of the US economy. While traders are still fully pricing in one quarter-point rate increase by the ECB by the end of the year, the probability of a second hike has significantly decreased from 50% to 20%, according to swaps markets. Analysts at Capital Economics even suggest the ECB might be "one and done" with rate rises, expecting euro area inflation to return to the central bank's 2% target by the end of 2027.
The euro's weakening against the dollar also reflects a broader rally for the greenback. The dollar gained ground after a hawkish turn by the Federal Reserve last week increased expectations of rate hikes in the US, thereby enhancing the dollar's relative attractiveness. Meanwhile, the Eurozone economy has shown signs of contraction, as indicated by recent purchasing managers' indices. ECB president Christine Lagarde has acknowledged that current economic data does not necessitate a "more forceful policy response" at this juncture after the recent rate increase. The euro has also fallen 0.4% against the sterling this month, hitting its lowest point since last August.
