The euro has fallen to its lowest level in over a year as the US-Iran deal quietly reshapes the ECB’s rate hike path.

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The Euro has been under obvious pressure against the US dollar this month, falling to its lowest level in over a year. The market’s repricing of the European Central Bank’s policy path, combined with the Federal Reserve’s continued hawkish stance, has led to a divergence, jointly pushing the Euro into a phase of weakness.

Since this month, the Euro has fallen by about 2.6% against the US dollar, hitting a new low since early June 2025, and clearly deviating from the appreciation path widely expected by the market at the start of the year. Previously optimistic sentiment supporting the Euro has obviously reversed.

The core driver comes from the simultaneous changes in energy prices and economic growth expectations. As a US-Iran agreement drives oil prices down, input inflation pressure in the Eurozone eases; meanwhile, weakening economic data undermines growth expectations, causing the market to rapidly cool on the necessity for further ECB rate hikes.

From a policy perspective, the US-Europe divergence has become the main pricing thread. The Federal Reserve's hawkish signals reinforce the dollar’s yield advantage, while the Eurozone’s insufficient growth momentum and declining inflation pressures restrict the ECB's tightening room, continually diminishing the Euro's appeal.

Recently, ECB President Lagarde indicated that current economic data does not require a stronger policy response, interpreted by the market as a marginal shift in stance. Under the combined influence of falling energy prices, slowing growth, and converging policy expectations, the Euro faces continued short-term pressure.

Falling Oil Prices and Economic Weakness Double Pressure the ECB

Falling energy prices are simultaneously constraining the ECB’s rate hike room from both supply-demand and policy expectation dimensions.

On one hand, input inflation pressure is noticeably easing, reducing the necessity of further monetary tightening; on the other hand, months of elevated energy costs have substantially dragged on Eurozone economic activity, weakening growth momentum further, resulting in a dual constraint of “falling inflation + cooling growth”.

Lee Hardman, Senior Currency Economist at Mitsubishi UFJ Financial Group (MUFG), said, “The Eurozone economy has slowed due to the shock of energy prices. The combination of weak growth and lower energy prices is easing pressure for further ECB rate hikes.”

The latest economic data further reinforce this adjustment direction. The Eurozone PMI released on Tuesday returned to contraction territory, indicating overall cooling of business activity. Confidence in Euro long positions has accordingly dropped, and short-term capital is inclined to reduce risk exposure.

Rate market pricing shows that traders are still fully pricing in a single 25-basis-point rate hike this year, but the probability of another hike has quickly fallen from around 50% to about 20%, reflecting noticeably converging policy expectations.

Capital Economics believes this rate hike cycle may be nearing its end, and could possibly be “one and done”. The institution notes that Eurozone inflation is very likely near a cyclical peak, subsequent energy inflation will continue to fall, food and core inflation have limited upside, and wage-driven second-round effects are also quite moderate. Based on this assessment, Eurozone inflation is expected to gradually fall to the 2% policy target level over the next few years.

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