Euro holds near seven-week high as sentiment improves and ECB cut bets fade

The euro traded above $1.08 on Tuesday, holding near a seven-week peak against the dollar as a run of better-than-expected sentiment indicators forced traders to reassess how quickly the European Central Bank will cut interest rates. The move marks a noticeable shift from the spring, when the single currency drifted towards $1.06 amid expectations of a rapid easing cycle.

Sentiment data drives repricing of ECB expectations

The rally's immediate catalyst is a cluster of surveys suggesting the eurozone economy may have passed its low point. The European Commission's economic sentiment indicator, the purchasing managers' indices from S&P Global, and national business climate gauges have all shown modest improvement since May. While none point to a vigorous rebound, they have been enough to convince markets that the ECB can afford patience.

Money markets now price roughly 50 basis points of further cuts by year-end, down from 75 basis points a month ago. That repricing has narrowed the interest rate differential with the United States, where the Federal Reserve is also expected to ease but on a less certain timeline. The result is a euro that benefits from both reduced dovishness at home and a dollar that lacks a clear directional driver.

ECB officials have reinforced the message. In speeches through July and early August, policymakers stressed a meeting-by-meeting, data-dependent approach, with several noting that the current deposit facility rate of 3.25 per cent is likely restrictive enough to return inflation to target without crushing growth. The ECB's press archive shows a consistent shift in language from "further progress on disinflation" to "monitoring incoming data for signs of durability".

German stabilisation anchors the rally

No single data point carries more weight than the Ifo business climate index, which has ticked higher for three consecutive months. The Munich-based institute's survey of roughly 9,000 firms shows both current conditions and expectations improving, a pattern that historically precedes a turning point in industrial production. Germany's manufacturing sector, which contracted for five straight quarters through early 2025, appears to be finding a floor.

Destatis confirmed the trend in its latest industrial orders figures, which showed a 1.3 per cent month-on-month rise in June, led by capital goods. The Bundesbank, in its monthly report, noted that "the worst of the industrial recession appears to be behind us" while cautioning that structural headwinds, energy costs, Chinese competition, demographic drag, remain intact.

For the euro, Germany matters disproportionately. As the largest economy in the bloc, its business cycle drives the aggregate. A stabilising Ifo index reduces the probability of a deep recession scenario that would force the ECB into aggressive cuts, thereby supporting the currency.

Inflation stickiness limits ECB room for manoeuvre

The ECB's caution is not merely about growth. Headline inflation in the eurozone fell to 2.4 per cent in July, according to Eurostat's flash estimate, but core inflation, excluding energy, food, alcohol and tobacco, held at 2.8 per cent. Services inflation, the component most sensitive to domestic wage pressures, remained above 3.5 per cent.

Those numbers explain why the Governing Council is in no hurry. The ECB's own projections, published in June, see core inflation averaging 2.8 per cent this year and 2.3 per cent in 2027, still above the 2 per cent target. Until services inflation shows a decisive turn, officials have signalled they will keep policy restrictive. That stance, communicated in the July press conference and subsequent interviews, has been a prop under the euro.

Export sectors feel the pinch of a stronger currency

The currency's rise is not universally welcomed. A euro at $1.08 is roughly 3 per cent stronger than its April low, and for an export-dependent economy that matters. The European Commission's summer forecast assumed an average EUR/USD of $1.07 for 2026; sustained trading above that level acts as a drag on net exports.

Manufacturing associations in Germany, Italy and France have all flagged competitiveness concerns in recent position papers. The mechanical engineering sector, a bellwether for German capital goods, reported that order intake from non-eurozone countries fell 4 per cent year-on-year in the second quarter, with currency cited as a factor alongside weak Chinese demand. The flip side, cheaper imports of energy and intermediate goods, helps inflation but does not offset the top-line pressure on exporters.

Technical levels and the Fed wildcard

From a chart perspective, the $1.09 area represents the next meaningful resistance. That level capped rallies in March and May, and a clean break would likely trigger momentum buying towards $1.1050, the 200-day moving average. Downside, the 50-day moving average near $1.0720 and the psychological $1.07 mark are the first lines of defence. A daily close below $1.07 would signal the rally has run its course.

The external driver remains US monetary policy. The Federal Reserve held rates steady at its July meeting but left the door open for a September cut. If US inflation data continue to soften, the dollar could weaken further, lifting the euro regardless of eurozone fundamentals. Conversely, a strong US payrolls report or sticky services inflation would revive the "higher for longer" narrative and pressure EUR/USD back towards $1.06.

What the data calendar holds next

The next two weeks will test the euro's resilience. Flash eurozone GDP for the second quarter is due on 14 August, with consensus expecting 0.2 per cent quarter-on-quarter growth, barely positive. A miss would revive stagnation fears. The following week brings the July harmonised index of consumer prices breakdown, where services inflation will be scrutinised for any sign of a turn.

On the German calendar, the ZEW expectations survey on 12 August and the final Q2 GDP reading on 26 August will update the picture. The ECB's own accounts of the July meeting, published on 21 August, may reveal how many governors favoured a pause versus another cut. None of these are likely to shift the needle dramatically on their own, but together they will determine whether the current pricing, fewer cuts, stronger euro, survives the summer.