The euro weakened against a basket of major global currencies during European trading on Friday, pulling back from a six-week high against the US dollar as traders took profits while the greenback recovered amid continued military exchanges between the United States and Iran.

Investors are now awaiting the release of July inflation data from the eurozone later today, which is expected to play a key role in reshaping expectations for future European Central Bank interest rate decisions.

The figures are expected to provide fresh insight into whether inflationary pressures remain strong enough to influence the ECB's monetary policy normalization path in the coming months.

The Price

The euro fell 0.2% against the US dollar to $1.1504, down from the day's opening level of $1.1527, after reaching an intraday high of $1.1531.

The single currency ended Thursday up 0.55% against the dollar, marking its third consecutive daily gain and reaching a six-week high of $1.1537 following weaker-than-expected US economic data and speculation that Japanese authorities had intervened in the foreign exchange market.

Monthly performance

With July trading set to conclude following Friday's settlement, the euro is up 0.75% against the US dollar for the month and is on track to post its first monthly gain in three months.

The monthly advance has been driven by bargain buying after the euro fell to a 13-month low in June, as well as rising expectations that the European Central Bank will raise interest rates in September.

US dollar

The US Dollar Index rose more than 0.25% on Friday and is on track for its first gain in four sessions after rebounding from a six-week low of 99.86.

In addition to bargain buying, the US dollar has benefited from renewed safe-haven demand as geopolitical tensions in the Middle East intensified following continued military exchanges between the United States and Iran.

Developments in the Iran conflict

The United States launched a new wave of large-scale airstrikes targeting dozens of sites linked to Iran's Islamic Revolutionary Guard Corps.

Iran continued its military response with missile and drone attacks targeting US-linked sites and allied assets.

Regional tensions escalated further after a US gas vessel was attacked by a drone at Egypt's Damietta port.

Saudi Arabia announced it would lead a 14-country maritime coalition aimed at strengthening security in the Red Sea, Bab el-Mandeb, and the Arabian Gulf.

Diplomatic efforts remain underway despite the escalation, with regional contacts continuing in an attempt to contain the crisis and reduce tensions, although no new ceasefire agreement or comprehensive return to negotiations has been announced.

European interest rates

Reuters reported that European Central Bank officials are prepared to raise interest rates in September if inflationary pressures persist.

Money markets continue to price in a 65% probability of a 25-basis-point ECB rate increase in September.

Eurozone inflation

Investors are awaiting the release of July eurozone inflation data later today, which is expected to help reshape expectations for another ECB interest rate increase this year by providing a clearer picture of inflationary pressures facing policymakers.

The annual eurozone Consumer Price Index is due at 09:00 GMT. Market expectations point to annual inflation accelerating to 2.9% in July from 2.8% in June, while core inflation is expected to remain unchanged at 2.4%.

Economic Outlook

We expect that if inflation data comes in stronger than markets anticipate, expectations for a European Central Bank rate hike in September will increase, providing further support for the euro against a basket of global currencies.