Euro Falls to Over 3-Month Low

The euro was little changed at $1.164, trading near a six-week low touched last week, as renewed Middle East unrest dampened market sentiment. Optimism about a resolution to the three-month US-Iran conflict, which has severely disrupted Middle Eastern oil and gas supplies and driven global inflation higher, faded after Washington confirmed defensive strikes in southern Iran, signaling that any peace deal remains distant. On the policy front, ECB official Isabel Schnabel told Reuters the central bank should raise interest rates in June even if a peace agreement is reached, citing the scale and persistence of the energy shock. Other policymakers have also recently argued for tighter policy. Money markets now price in a near 90% chance of a June hike, with roughly 60 basis points of tightening expected by year-end, pointing to at least two quarter-point increases.

The euro strengthened to $1.163, recovering from a six-week low, as investors cheered progress in US-Iran negotiations that pushed Brent crude below the $100-per-barrel mark. President Donald Trump said a memorandum of understanding between the two nations had been "largely negotiated" and would reopen the Strait of Hormuz. US Secretary of State Marco Rubio described the potential deal as "pretty solid," suggesting it could lead to "very real, significant time-limited negotiations on nuclear matters." Last week, PMI data revealed the Eurozone economy contracted in May at its fastest pace since late 2023, driven by a war-fueled surge in living costs, with S&P Global warning the figures point to inflation approaching 4%. Money markets are currently pricing in two ECB rate hikes before year-end.

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.