Euro Softens to $1.17 as Markets Eye Interest Rate Outlook

The euro traded at $1.16, near its weakest level since early April, as investors weighed mixed economic data and monitored US-Iran negotiations. German consumer sentiment improved heading into June, defying expectations of a further decline, driven by a rebound in income expectations. Business confidence also edged higher in May, recovering from April’s six-year low, while a separate report confirmed 0.3% GDP growth in Q1 2026. However, Thursday’s PMI revealed the euro area economy unexpectedly contracted in May at the fastest pace since late 2023, amid a war-driven surge in living costs. S&P Global warned the data points to inflation nearing 4% in the coming months. Money markets are pricing in at least two ECB rate hikes before year-end. Meanwhile, investors grew more optimistic about progress in US-Iran peace negotiations after US Senator Marco Rubio noted "some good signs" in Iran talks, though Tehran’s uranium stockpile and control over the Strait of Hormuz remain key obstacles.

The euro erased early gains to trade around $1.16, close to its weakest level since early April, as investors assessed weak S&P Global flash PMI data and Middle East developments. The survey revealed that the euro area economy unexpectedly contracted in May at the fastest pace since late 2023, with a war-driven surge in living costs suppressing service demand and pushing input price inflation to a three-year high. S&P Global also cautioned that the data points to inflation nearing 4% in the coming months. At the same time, crude prices remained close to four-year highs amid doubts that a US–Iran deal can be reached soon or that traffic through the Strait of Hormuz will be fully restored. The European Central Bank, which held interest rates steady last month but discussed a potential increase, has signaled both publicly and privately that a rate hike could come as early as June.

The euro climbed to $1.163, recovering from one-month lows, as investors digested S&P Global flash PMI data and Middle East developments. The survey revealed the euro area economy unexpectedly contracted in May at the fastest pace since late 2023, with a war-driven surge in living costs suppressing service demand and pushing input price inflation to a three-year high. France recorded its sharpest contraction since 2020, while Germany’s output fell for a second consecutive month. S&P Global also cautioned that the data points to inflation nearing 4% in the coming months. The European Central Bank, which held rates steady last month but discussed a potential increase, has signaled, both publicly and privately, that a rate hike could come as early as June. Elsewhere, Brent crude prices stayed elevated after President Donald Trump said Iran negotiations were in the "final stages" but warned of renewed attacks if Tehran rejected his terms.