EUR/USD Surges on Diverging Rate Expectations

The EUR/USD exchange rate has been rising steadily since August 21, reaching three-month highs around 1.1700-1.1710.

This upward movement can be attributed to shifting interest rate expectations, with the probability of a near-term Fed rate hike falling sharply after weak U.S. data, while the market is now almost fully pricing in further ECB tightening.

The eurozone's macroeconomic backdrop appears resilient enough for the ECB to maintain a hawkish stance, with above-target inflation and steady economic activity strengthening the case for raising the deposit rate to 2.50% by September, as implied by market probabilities of around 90-95%.

In contrast, the U.S. situation is less favorable, with weak data releases causing the probability of a September rate hike to fall to around 30%, making it more likely that the Fed will keep rates unchanged at least at its next meeting.