Euro Surges on ECB Hike Bets as Sterling Struggles

The euro has gained momentum in August, reaching its strongest level against the dollar in three months. The currency climbed to $1.1697 on the back of ECB hike bets that are gaining traction. French and Spanish inflation both surprised to the upside, with Spain's harmonised reading hitting 4.5%, its highest since 2023.

This has reinforced market expectations that the ECB deposit rate could climb to 2.80% by next March, from 2.25% currently. A September hike is now seen as roughly 60% likely.

Meanwhile, sterling is navigating a complex domestic backdrop. The Bank of England's July decision was initially read as hawkish, but Governor Bailey used his press conference to firmly close the door on near-term hike bets.