Euro Nears $1.18 on Middle East Talk Hopes

The euro climbed toward $1.18, reaching its highest level since before the outbreak of war in late February, as investors grew optimistic about the potential for Middle East peace negotiations. This optimism persisted even as the US maintained its blockade of Iranian ports, creating a mixed geopolitical backdrop. Negotiating teams from the US and Iran may return to Islamabad this week, just days after their latest round of talks concluded without a breakthrough. The prospect of renewed dialogue was enough to spark a shift toward riskier assets, while oil prices retreated below $100 per barrel. However, inflationary pressures driven by elevated energy costs are likely to persist as long as the Strait of Hormuz remains closed, prompting markets to expect a more hawkish European Central Bank. Traders now price in at least two rate hikes by year-end.

The euro dipped below $1.17, retreating from a six-week peak of $1.174 reached on Friday, as prospects for a US-Iran peace deal dimmed. Negotiations in Pakistan collapsed after Tehran dismissed Washington’s demands, with both sides showing little willingness to resume talks. Adding to market unease, US President Donald Trump threatened a naval blockade of the Strait of Hormuz and suggested limited military strikes against Iran, despite an existing ceasefire. The strategic waterway’s significance sent oil prices skyrocketing, Brent crude climbed to around $102 per barrel, and led markets to anticipate a more aggressive stance from the European Central Bank, with traders now pricing in nearly three interest rate hikes by year-end, up from two just last week.

The euro traded above $1.17, reaching its highest level since late February and heading for a nearly 1.5% weekly gain against the US dollar, amid optimism over a potential Russia-Ukraine peace deal and as investors adopted a cautious wait-and-see approach ahead of the US-Iran ceasefire negotiations this weekend. Ukraine’s lead negotiator signaled progress in talks with Russia, suggesting a resolution to the conflict could be achieved sooner than expected. Meanwhile, US and Iranian negotiators are set to meet on Saturday, though tensions remain elevated. Tehran continues its near-total blockade of the Strait of Hormuz, while US President Trump struck a dual tone, expressing optimism about a possible deal but later warning Iran over new fees imposed on ships transiting the vital waterway. On the monetary policy front, rising oil prices stoked inflation fears, leading markets to price in a more hawkish ECB, with traders expecting at least two rate hikes by end-2026.