Euro Falls to One-Year Low as Retreating Oil Prices Cool ECB Rate Hike Expectations
Taylor Wilson
The euro has fallen 2.6% against the dollar this month to 1.135, its lowest since early June 2025; retreating oil prices and weakening data have slashed the market-implied probability of a second ECB hike from 50% to 20%, leaving the euro's rebound case hard to rebuild.
Why did the euro drop so sharply?
The US-Iran deal restored oil flows through the Strait of Hormuz, pulling crude prices lower and directly easing eurozone inflation pressure.
This means → the ECB's core argument for further hikes — "inflation is still too high" — just lost a major pillar, and markets repriced immediately.
Eurozone PMI — the purchasing managers' index, a monthly gauge of business activity — showed activity contracting, with growth and inflation weakening in tandem, making the case for more hikes even harder to sustain.
Will the ECB keep hiking?
Swap-market pricing shows traders still fully expect one more 25-basis-point hike this year, but the probability of a second hike has dropped from 50% to 20%.
Capital Economics argues the ECB may "hike once and stop", forecasting inflation will fall from above 3% in May to the 2% target by end-2027.
ECB President Christine Lagarde reinforced this direction, saying recent data do not call for "a more forceful policy response at this stage."
In plain terms = one more hike is the base case; a second is now a long shot unless inflation surprises to the upside again.
How is dollar strength making things worse?
The Fed sent hawkish signals last week, triggering a broad dollar rally — the euro is not just weak on its own; the dollar is actively pushing it down.
JPMorgan cut its euro target from $1.13 to $1.10, citing "stabilising growth, sticky inflation, and the shadow of US economic exceptionalism."
This reflects a full narrative reversal: at the start of the year Wall Street broadly expected the euro to rise to 1.20; that call has been completely unwound.
What does the euro-sterling move tell us?
The euro fell only about 1% against the pound this month — far less than the 2.6% drop against the dollar.
This means → the driving force is dollar strength, not a broad-based euro collapse — if the euro itself were in deep trouble, it would be falling just as hard against sterling.
What to watch next?
MUFG economist Lee Hardman notes that the combination of weak eurozone growth and falling energy prices is easing the pressure on the ECB to hike further.
Lower oil prices relieve the inflation shock but simultaneously compress the rate-hike path, leaving the euro's rebound logic stuck in a bind.
In plain terms = it comes down to one variable — whether the eurozone economy can genuinely recover from the energy shock; only a real recovery gives the euro a foundation to bounce back.
Content is for reference only, not financial advice.