The euro edged higher against the dollar during Asian trading hours on Thursday (September 3), currently trading around 1.1595. The exchange rate remains in its lowest range since August 20. The probability of a Fed rate hike in September has risen to 62.3% (before Warsh's hawkish remarks, it was below 40%), and escalating conflicts in the Middle East are limiting the euro's upside potential. ECB Governing Council member Makhlouf stated that further rate hikes would be needed if inflation "moves in the wrong direction," and Nagel said the market is pricing in a more than 95% probability of a September rate hike. The resilience of the Eurozone economy is providing support for the euro, but concerns about terms of trade triggered by the rebound in oil prices are weakening euro sentiment.

Hawkish expectations from the Federal Reserve and geopolitical risks weighed on the euro.

The euro has been consolidating around 1.1580 against the dollar recently, but its upside potential remains limited. Federal Reserve Chairman Warsh's hawkish remarks significantly altered market expectations, boosting the probability of a September rate hike from less than 40% to 62.3%, strengthening interest rate support for the dollar. Meanwhile, Trump stated that strikes against Iran "may be short-lived," but reiterated the strategic importance of controlling the Strait of Hormuz; Iran warned of a "new strategy," and these statements escalated geopolitical tensions. The fluctuating situation in the Middle East has provided significant safe-haven buying for the dollar, further solidifying its relative strength. Against the backdrop of rising Fed rate hike expectations and geopolitical risks, the dollar has received double support, while the euro faces continued pressure. Traders generally believe that unless US economic data weakens significantly or geopolitical conflicts de-escalate rapidly, the euro/dollar pair will struggle to break through resistance levels in the short term, and market sentiment leans towards caution and a wait-and-see approach.

European Central Bank interest rate hike expectations supported the euro, but rebounding oil prices raised concerns about terms of trade.

Hawkish voices within the European Central Bank continue to provide structural support for the euro. Governing Council member Makhlouf explicitly stated that further interest rate hikes would be necessary if inflation "moves in the wrong direction"; Nagel pointed out that the market has priced in a September rate hike with a probability exceeding 95%, demonstrating policymakers' vigilance regarding inflation risks. These statements help stabilize the euro's interest rate expectation advantage. However, Scotiabank cautions that the recent weakening of the euro coincided almost simultaneously with the rebound in the energy market – "The new deterioration appears to have occurred concurrently with the recent recovery in oil prices, raising concerns about the eurozone's terms of trade as a major energy importer." The rise in oil prices directly increases import costs, weakening the eurozone's terms of trade and thus partially offsetting the support from interest rate differentials. Shifting commodity dynamics are becoming a potential drag on the euro. Going forward, the market will closely watch the US ISM Services PMI and Friday's non-farm payroll data to assess the Fed's policy path and further developments in risk sentiment.

Institutional Views

Despite the short-term downward pressure on the euro from rebounding oil prices and expectations surrounding the Federal Reserve, major institutions maintain their medium-term bullish outlook for the euro. MUFG, in its September 2026 monthly FX outlook, stated that the euro/dollar target for Q3 2026 is 1.1500, rising to 1.1800 in Q4, and further to 1.2000 in Q1 and Q2 2027. In the short term, supported by rising expectations of a Fed rate hike and geopolitical risks, the relatively strong dollar may put downward pressure on the euro; however, the medium-term outlook favors a stronger euro. The bank believes that a September rate hike by the ECB is almost a certainty, and its subsequent policy path will remain hawkish, while the Fed's room for rate hikes is limited, gradually benefiting the euro from interest rate differentials. Meanwhile, the US fiscal deficit and the pressure of Treasury supply may weaken the dollar's attractiveness. Political uncertainty (German state elections, French presidential election) remains, but overall fundamentals and policy differentials support the euro's medium-term upside. MUFG cautions that energy price fluctuations may disrupt short-term trends and suggests paying attention to pricing adjustments following the September decisions of the two major central banks. ING maintains its year-end target for the euro against the US dollar at around 1.18, with a short-term target of around 1.17 (end of September) and a 12-month target of 1.20. The bank believes the ECB's September rate hike is fully priced in and provides structural support for the euro, but recent rebounds in energy prices have raised concerns about terms of trade, limiting the euro's near-term upside. Strategists point out that the US dollar is not yet ready for a sustained and significant weakening; high energy prices and long-term US Treasury yields continue to support the dollar, making a significant breakout for EUR/USD unlikely in the short term. If the Federal Reserve ultimately does not raise rates or raises rates by less than market expectations, the euro is expected to gradually strengthen. (Euro/USD daily chart, source: FX678) At 12:23 Beijing time, the euro was trading at 1.1595/96 against the US dollar.