Euro Under Pressure Amid US-Iran Tensions and Spanish Inflation Jump

The euro edged lower to $1.152 as traders weighed the latest in US-Iran negotiations, including a 10-day extension of President Donald Trump’s deadline for a deal to April 6. While German Foreign Minister Johann Wadephul confirmed indirect contacts and upcoming direct talks in Pakistan, the muted market reaction suggests skepticism that a breakthrough is imminent, with President Trump seen as buying time to bolster military presence in the region. Meanwhile, Spain’s inflation surged to 3.3% in March, the highest since June 2024, though below expectations of 3.9%. The shift in ECB policy expectations has been stark: traders now price in at least two interest rate hikes this year, with a strong chance of a third, reversing earlier bets on a 40% likelihood of a 2026 cut.

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.