Euro Rally Stalls Against USD as Markets Expect Further ECB Tightening

The Euro (EUR) has lost some steam in its recent rally against the US Dollar, according to Scotiabank strategists. The currency's price action is mirroring yield spreads, with markets still pricing a hawkish European Central Bank (ECB) path. This means that investors expect the ECB to raise interest rates, which can strengthen the Euro.

The ECB is expected to tighten its monetary policy by 24 basis points in September and 40 basis points by year-end. Despite this, sentiment remains constructive, with risk reversals showing a modest premium for EUR strength. This suggests that investors are still optimistic about the Euro's prospects.

The Euro's rally from late July has stalled, with recent gains struggling to extend beyond $1.17. However, there is potential support for the currency in the mid-$1.16 range and even closer to its 200-day moving average at $1.1633.