The euro hovered just above $1.165, near its highest level since mid-May, as investors weighed falling oil prices and the outlook for European Central Bank interest rates. Sentiment improved after Iran said it had resumed talks with Oman on managing the Strait of Hormuz, raising hopes that the key shipping lane could reopen and ease disruptions to energy flows.
At the same time, Reuters reported that ECB policymakers are prepared to raise rates at their September meeting to contain the economic fallout from the war in Iran, though they are hesitant to signal further tightening beyond that point. Separately, ECB Executive Board member Isabel Schnabel said interest rates may need to increase further if the Middle East conflict drags on, pointing to upside inflation risks stemming from the resilience of the euro-area economy.
Money markets are currently pricing in less than 40 basis points of additional ECB tightening by year-end, with a September rate hike almost fully factored in.