Euro Gains for 3rd Week

The euro strengthened above $1.18, reaching its highest level since before the conflict with Iran began, supported by broad dollar weakness as investors welcomed news of the temporary reopening of the Strait of Hormuz, which helped ease near-term inflation concerns. Iran’s foreign minister confirmed that the strait is fully open to all commercial vessels for the duration of the 10-day ceasefire. In response, oil prices tumbled more than 10%, alleviating some pressure on inflation. The euro is up 2.7% on the week, its biggest gain in a year, and is on track for a third consecutive weekly advance, as traders increasingly bet the ECB may raise interest rates this year. Earlier in the week, ECB President Lagarde acknowledged that elevated energy costs have pushed the eurozone away from its baseline economic path, but she refrained from signaling any imminent rate increases.

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.