Euro Rises on ECB's Hawkish Policy Outlook

EUR/USD extended the previous day's gains, trading around 1.16505 in the Asian session on Friday. The main driver behind the pair's strength is the latest hawkish comments from European Central Bank President François Villeroy de Galhau, who emphasized the bank's readiness to "take necessary measures" to achieve its inflation target.

#### Hawkish Policy Stance Underpins Euro

Expectations surrounding the ECB's policy outlook are increasingly turning hawkish. According to earlier reports, President Villeroy de Galhau reiterated on Tuesday that the bank will not hesitate to act to successfully bring inflation back to target. This stance reduces the likelihood of a near-term shift toward easing. Meanwhile, eurozone macro data also supports the hawkish position. Per market reports, the eurozone's one-year inflation expectation stands at approximately 2.4%, still above the bank's 2% official target, while July's actual inflation rate edged up to 2.9%. Additionally, second-quarter economic growth reached 0.4%, noted as the fastest pace since early 2025, further fueling market expectations that the ECB will maintain its tightening policy.

#### Dollar Weakness and Improved Risk Sentiment

EUR/USD's upside also benefits from a weaker dollar. Market reports indicate that safe-haven demand has receded amid emerging hopes of a potential US-Iran deal. This improvement in risk appetite pressures the dollar, which plays a safe-haven role, indirectly lifting EUR/USD. In contrast, in the broader market, soft commodity prices partially offset the tightening concerns stemming from the hawkish policy.

#### What to Watch Next

In the near term, the ECB's policy direction remains the core variable driving the euro's movement. Investors are closely monitoring subsequent remarks from ECB officials for more clues on the rate hike path. Should economic data continue to show resilience, the euro's firm tone may be sustained for a period.