Euro Rises on Middle East Ceasefire Optimism

The euro edged closer to $1.15, hovering near its lowest level since early April, after the European Central Bank delivered an expected 25-basis-point rate hike, its first since 2023. Policymakers cited surging energy costs and persistent inflation risks, exacerbated by the Iran conflict and disruptions to oil shipments through the Strait of Hormuz. The ECB also raised its inflation forecasts, projecting headline inflation at 3.0% for 2026 (up from 2.6%) and 2.3% for 2027 (up from 2.0%), with core inflation now expected at 2.5% for both years (revised up from 2.3% and 2.2%). Growth outlook was slightly downgraded, with Eurozone GDP now forecast at 0.8% in 2026 (down from 0.9%) and 1.2% in 2027 (down from 1.3%). Meanwhile, the dollar remained firm amid ongoing Middle East tensions, as repeated military strikes and diplomatic setbacks dimmed hopes for a US-Iran resolution.

The euro was little changed around $1.15, hovering near its lowest level in more than two months as broad USD strength continued to weigh on the common currency. The dollar remained supported by tensions in the Middle East, with repeated military strikes and diplomatic setbacks clouding the prospects for a resolution between the US and Iran. Investors are also awaiting the ECB's monetary policy decision, with the central bank expected to raise interest rates by 25bps, marking its first rate hike since 2023. Such a move would lift the deposit facility rate to 2.25%. The expected increase comes as inflationary pressures intensify following the energy shock triggered by the conflict with Iran, while the ECB's updated economic projections are likely to point to further inflation acceleration in the months ahead. Market participants will also closely scrutinize the central bank's forward guidance, with expectations that policymakers could deliver at least one additional rate hike this year.

The euro stabilized at $1.154, remaining close to its weakest level in over two months, as Middle East tensions escalated, with the US and Iran exchanging fresh strikes. President Donald Trump stated that Iran is taking "too long" to negotiate a peace deal and will now "pay the price," while Iranian Parliament Speaker Mohammad Bagher Ghalibaf declared on Wednesday that Tehran would respond "decisively and without delay" to any aggression. Investors are also preparing for the European Central Bank’s policy meeting on Thursday, where a 25-basis-point rate hike, the first move in a year, is widely anticipated, as the Israel-Iran conflict sparked an energy crisis and increased inflationary pressures. Markets will closely watch President Lagarde’s press conference for signals on future policy direction.