EUR/USD Tests Two-Month Highs Amid Shift in Interest-Rate Expectations

The EUR/USD pair is testing two-month highs near 1.1610 as interest-rate expectations shift, with the euro gaining about 1.7% over the past month.

The main driver of this move is not the absolute interest-rate differential but rather the sharp repricing of the future policy path in the eurozone.

Final July inflation accelerated to 2.9% year-over-year from 2.8%, with services contributing most to price growth, and energy remaining a significant factor.

The market has largely abandoned expectations of ECB easing after the deposit rate remained unchanged at 2.25% in July, with swaps pricing in an 83% probability of a 25-basis-point hike as soon as September 10.