Euro Tries to Recover on Weaker Dollar

The euro gave up early gains to drop below the $1.16 mark, hitting its weakest level since late November, as lingering uncertainty over the Middle East conflict and concerns about rising inflation across the eurozone weighed on the currency. Oil prices remained under $90 per barrel after the International Energy Agency proposed a record release of strategic oil reserves to help ease the sharp rise in energy costs triggered by the Iran conflict. On the monetary policy front, expectations have shifted toward a more hawkish stance for the European Central Bank. Markets are increasingly pricing in at least one 25-basis-point rate hike this year, with some traders now considering the possibility of two increases. On Tuesday, Christine Lagarde reiterated that the ECB is committed to taking all necessary measures to keep inflation under control, despite the current surge in energy prices.

The euro attempted to consolidate gains above the $1.16 level, though it continued to trade close to a two-month low. The currency found some support from a broadly weaker US dollar and a modest improvement in overall market sentiment. Oil prices remained below $90 per barrel after the International Energy Agency proposed a record release of strategic oil reserves to help counter the sharp rise in energy prices since the beginning of the Iran conflict. On the monetary policy front, expectations have also shifted in a more hawkish direction for the European Central Bank. Markets are increasingly pricing in at least one 25-basis-point rate increase this year, while some traders are beginning to lean toward the possibility of two hikes. ECB President Christine Lagarde reiterated Tuesday that the central bank would take the necessary steps to keep inflation under control, despite the current surge in energy prices.

The euro traded around $1.16, hovering near the two-month lows reached last week, as investors continued to assess developments surrounding the conflict with Iran, the resulting surge in energy prices, and the implications for inflation and ECB policy. Some temporary relief came after US President Trump said the military operation in Iran could conclude soon and is progressing well ahead of the initially projected four- to five-week timeline. Oil prices also retreated to below $100 per barrel after Trump hinted at several measures aimed at keeping energy costs under control. Last week, ECB Chief Economist Philip Lane warned that a prolonged conflict in the Middle East and a sustained decline in regional oil and gas supplies could trigger a “substantial spike” in inflation and a “sharp drop in output” across the EA. Against this backdrop, markets now expect the ECB to raise its key interest rate by at least 25bps once this year.