Euro Falls as US-Iran Tensions Escalate

The euro held steady at $1.165 on the last trading session of May, on track for a 0.8% monthly loss against the USD. Investors analyzed fresh inflation data from Europe’s largest economies for clues on the ECB’s policy direction, while monitoring developments in US-Iran peace talks. Flash data revealed EU-harmonized inflation accelerated in May across France, Italy, and Spain, while Germany saw a slowdown, yet all remained well above the ECB’s 2% target. ECB minutes suggested some policymakers would have backed an April rate hike if proposed, reinforcing expectations of a 25-basis-point increase at the June 11 meeting. Meanwhile, White House sources said the US and Iran agreed on a 60-day ceasefire extension MoU to allow formal talks, though President Trump has not yet approved it. Elsewhere, geopolitical tensions rose after a Russian drone struck a building in Romania’s Galati overnight, during broader attacks on Ukrainian infrastructure near the border.

The euro edged higher to $1.164, attempting to recover from a six-week low as markets assessed both Middle East developments and shifting expectations for European monetary policy. According to Axios, US and Iranian negotiators have reportedly agreed on a 60-day memorandum of understanding to extend a ceasefire and open talks on Iran’s nuclear program, though final approval from President Trump is still pending. While the diplomatic outlook offered some support for risk sentiment, geopolitical tensions remain elevated. At the same time, investors parsed the latest European Central Bank meeting minutes, which showed several policymakers viewed the April decision to hold rates as a close call, with some indicating they would have supported a hike had it been proposed. Money markets are now pricing in an almost fully expected 25-basis-point rate hike on June 11, with at least one additional increase anticipated by year-end.

The euro fell to $1.161, nearing a six-week low, as rising Middle East tensions dimmed hopes for a swift resolution to reopen the Strait of Hormuz and fueled concerns about the Eurozone’s economic health. Brent crude climbed to around $97 a barrel after reports of US airstrikes on an Iranian military site and new sanctions targeting Iran’s revenue from ships transiting the strait. A US official emphasized the defensive nature of the strikes and reaffirmed the country’s commitment to last month’s ceasefire. Adding to the unrest, Kuwait reported countering hostile drone and missile threats, deepening regional instability. Money markets increased their bets on European Central Bank interest rate hikes, pricing in just under 65 basis points of tightening this year, up from just under 60 basis points late on Wednesday.