Euro holds modest gains as US Dollar lacks momentum, Eurozone inflation in focus

EUR/USD holds modest gains on Monday during American trading hours as the US Dollar (USD) struggles to build on Friday’s strength, which followed hawkish remarks from Federal Reserve (Fed) Chair Kevin Warsh at the Jackson Hole Symposium. At the time of writing, the pair trades around 1.1595, up roughly 0.11% on the day.

The US Dollar rose about 0.55% on Friday and reached its highest level in more than a week after Warsh signalled that the Fed may need to tighten monetary policy further. He stressed that the central bank’s 2% inflation target is “firm” and said policymakers still “have work to do” unless underlying inflation moves toward the target at a sufficient pace.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.55 on Monday after reaching 99.72, its highest level since August 14. US Treasury yields also surged following Warsh’s speech, with the benchmark 10-year yield trading near 4.75% at the time of writing, its highest level since January 2025.

According to the CME FedWatch tool, markets are pricing in around a 61% chance that the Fed will raise interest rates in September, up from 38% before Warsh’s remarks.

On the Euro side, softer-than-expected preliminary German inflation data did little to alter expectations that the European Central Bank (ECB) will raise interest rates next month. Strategists at Brown Brothers Harriman note that Tuesday Eurozone inflation data should underscore lingering price pressures. In their view, “above target inflation and a firmer growth outlook give the ECB scope to normalize the policy rate towards the upper end of its estimated 1.75% to 3.00% neutral range.”

Reflecting this backdrop, BBH highlights that “the swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.50% on September 10 and a total of 60bps of tightening over the next twelve months.”

At the same time, rising energy prices due to tensions in the Middle East are adding to concerns that inflation could stay above the Fed’s and ECB’s 2% targets for longer. This supports expectations of tighter monetary policy on both sides of the Atlantic.

However, the US Dollar is likely to retain the upper hand as hawkish Fed expectations, elevated Treasury yields and geopolitical tensions keep the Greenback supported in the near term. Attention now turns to this week’s US economic data, particularly Friday’s Nonfarm Payrolls (NFP) report, which could shape expectations for the September decision.