Euro Gains as US-Iran Deal Hopes Rise

The euro strengthened above $1.17, trading at its highest since April 21, as optimism over a potential US-Iran agreement grew. US President Donald Trump paused "Project Freedom," the operation guiding ships through the Strait of Hormuz, citing "great progress" in talks with Iran. Yet, he stressed that the US blockade of ships to and from Iranian ports would "remain in full force and effect," keeping uncertainty alive over the Strait’s future. Money markets now expect the ECB’s deposit facility rate to reach around 2.7% by December, reflecting two fully priced hikes and a possible third, with an 85% probability of a first rate increase in June.

The euro traded near $1.17, as investors weighed Middle East tensions, new US tariffs, and rising expectations of an ECB rate hike as soon as June. Oil prices stayed close to four-year highs due to the US-Iran standoff over the Strait of Hormuz. Meanwhile, Trump ordered the withdrawal of 5,000 US troops from Germany, hinting at further cuts, and raised tariffs on EU cars and trucks to 25%, accusing the EU of failing to uphold its trade deal with Washington. Markets now price in over three ECB hikes this year. Though the ECB held rates steady last week, it signaled potential adjustments, citing inflation risks and growth concerns. Officials Joachim Nagel, Madis Müller, and Peter Kazimir hinted at tightening in June, warning of persistent price pressures.

The euro traded near $1.17 in early May as investors assessed Middle East tensions, new US tariffs, and growing expectations of an ECB rate hike as early as June. Oil hit four-year highs after Iran allegedly struck a US warship in the Strait of Hormuz, following Tehran’s warnings that any US interference in the waterway would violate the ceasefire. Separately, Trump ordered the withdrawal of 5,000 troops from Germany, hinting at further reductions, and raised tariffs on EU cars and trucks to 25%, accusing the bloc of failing to honor its trade agreement with Washington. Markets are pricing in an 80% chance of a 25-basis-point ECB rate hike by June, with at least two increases expected this year. The ECB held rates steady last week but left the door open for future adjustments, citing inflation risks and growth concerns. Officials Joachim Nagel, Madis Müller and Peter Kazimir suggested potential tightening in June, warning of persistent price pressures.