Euro Holds Near Multi-Week Low Amid Middle East Tensions

The euro traded around $1.16, near its weakest level since January 16, as investors assessed the potential fallout from the escalating Middle East conflict alongside rising inflation risks and the prospect of a more hawkish stance by the European Central Bank. The confrontation has intensified, with reports that a US submarine sank an Iranian warship near Sri Lanka and that NATO air defenses intercepted an Iranian ballistic missile fired toward Turkey. The resulting spike in energy prices is expected to sustain inflationary pressures across Europe, reinforcing expectations that the ECB may adopt a tighter monetary policy approach. February data reinforced these concerns, showing annual euro area inflation at 1.9% and core inflation at 2.4%, both above forecasts. Markets now assign roughly a 40% probability of an ECB rate hike by year-end, reversing last week’s similar odds for a cut, and see about a 60% chance of an increase by June 2027.

The euro rose modestly to $1.165, partially recovering from early-week losses, as the dollar softened following reports that Iran had offered to discuss terms for ending the war. According to The New York Times, a day after US-Israel attacks began, operatives from Iran’s Ministry of Intelligence made an indirect approach to the CIA. Israeli officials, however, have urged Washington to ignore the approach for now, according to the report. Despite the slight rebound, the euro remains near one-and-a-half-month lows amid the ongoing Middle East conflict and concerns over rising energy costs. February Eurozone data showed annual inflation at 1.9% and core inflation at 2.4%, both above expectations. Markets now price roughly a 40% chance of an ECB rate hike by year-end, a sharp reversal from last week when a rate cut seemed equally likely.

The euro held earlier losses, trading around $1.16, its weakest level since mid-January, as the US dollar strengthened on safe-haven demand amid a sharp escalation in the Middle East conflict, despite stronger-than-expected Eurozone inflation data. US President Donald Trump said the military campaign against Iran could last four to five weeks but emphasized that US forces are prepared to extend operations if needed. Meanwhile, higher energy costs following the formal closure of the Strait of Hormuz and the ongoing halt of Qatari LNG exports are expected to intensify inflationary pressures across Europe, potentially prompting the ECB to adopt a more hawkish monetary policy stance. Eurozone February data showed annual inflation unexpectedly at 1.9% and core inflation at 2.4%, both above forecasts. Traders are now pricing in roughly a 40% probability of an ECB rate hike by year-end, a sharp reversal from late last week when markets assigned a similar likelihood to a rate cut.