Euro at Pre-War Levels

The euro hovered near $1.18, holding close to its pre-war highs, supported by broad-based dollar weakness as investors grow more optimistic that diplomatic efforts could bring an end to the US–Iran conflict. Reports indicate that both sides are considering a two-week extension of the ceasefire to allow additional time for negotiations, with a second round of talks expected in the near term. In this context, oil prices have eased from recent peaks, helping to alleviate inflationary pressures and prompting traders to scale back expectations for near-term monetary tightening by the ECB. Markets are now pricing in two 25 basis point rate hikes this year, down from three anticipated just a few weeks ago. Earlier in the week, ECB President Lagarde acknowledged that elevated energy costs have diverted the eurozone from its baseline economic trajectory, but she refrained from signaling any imminent rate increases.

The euro held just below $1.18 on Wednesday, close to its highest level since before the late-February war outbreak, amid optimism over potential progress in US-Iran peace talks. Mediators reported progress in extending the ceasefire, with both sides agreeing in principle to prolong negotiations focused on Tehran’s nuclear program, the Strait of Hormuz, and war compensation. US President Donald Trump suggested a deal could be near, though uncertainty remains after the US announced plans to deploy 10,000 more troops to the region soon. The prospect of dialogue eased oil prices below $100 per barrel and lifted risk appetite. However, inflationary pressures from elevated energy costs persist, with markets now pricing in at least two ECB rate hikes by year-end. On Tuesday, ECB President Christine Lagarde acknowledged that higher energy costs have pushed the eurozone off its baseline economic path, though she stopped short of signaling imminent rate increases.

The euro climbed to $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.