Euro Holds Below $1.16 on Middle East Tensions

The euro remained under pressure below $1.16 as investors shunned riskier assets amid escalating US-Iran tensions. Washington insisted Iran seeks a deal while deploying more troops to the region, but Iran’s foreign minister dismissed talks, instead demanding control over the Strait of Hormuz. Markets now expect two to three ECB rate hikes by year-end, following ECB President Christine Lagarde’s warning that the bank stands ready to act "at any meeting" to counter inflation risks from energy shocks. German consumer confidence also slumped to a two-year low heading into April, highlighting the conflict’s economic fallout.

The euro steadied near $1.16 on growing hopes of de-escalation in the Middle East, after reports that Washington proposed a 15-point peace plan to Tehran following a potential one-month ceasefire. Iran dismissed the claims, stating it was not engaged in negotiations and reiterating its distrust of US diplomacy. Brent crude dipped below $100 a barrel, easing fears of inflation driven by soaring energy costs and leading investors to trim expectations for rate hikes. ECB President Christine Lagarde warned that while the central bank is assessing the economic impact of the conflict, it stands prepared to adjust policy "at any meeting" if the energy price surge risks fueling broader inflation. Markets now price in only two ECB rate increases by year-end, down from earlier forecasts of three.

The euro slipped below $1.16 as investors weighed weaker-than-expected PMI data and ongoing Middle East tensions, raising fears of an energy-driven economic shock. The latest survey revealed Eurozone business activity growth at a ten-month low in March, with costs surging at the fastest pace in over three years due to soaring energy prices and supply chain disruptions from the war. Business confidence collapsed, suffering the sharpest decline since Russia’s 2022 invasion of Ukraine. Adding to the uncertainty, US President Trump delayed strikes on Iran for five days, citing "positive talks", a claim Tehran dismissed as "psychological warfare", though reports suggested indirect negotiations may be underway. With energy prices spiking, markets are doubling down on ECB rate hike expectations, despite the central bank’s recent decision to hold rates while upgrading inflation forecasts and downgrading growth projections amid deepening regional risks.