Euro Nears Three-Week High on ECB Hike Expectations

The euro extended gains above $1.175, reaching its strongest level since April 20, buoyed by optimism over a potential resolution to the Iran conflict. US President Donald Trump confirmed that the ceasefire with Iran remains in effect, while Tehran stated it is still reviewing a US proposal to end the conflict. US Secretary of State Marco Rubio added that Washington expects Iran’s response soon. Meanwhile, Trump warned the EU that the US would impose "much higher" tariffs on EU goods unless the bloc eliminates its tariffs on US products by July 4. Money markets are pricing in at least two rate hikes by the ECB this year, with a more than 75% probability of a first increase in June. ECB President Christine Lagarde noted on Friday that the central bank is prepared to act swiftly if needed and that the euro area’s economic starting position ahead of the energy shock is more favorable than it was before Russia’s invasion of Ukraine.

The euro traded above $1.17, approaching its strongest level since April 20, as markets turned more hawkish on the European Central Bank’s policy outlook amid renewed inflation concerns. Brent crude oil prices rose back above $100 per barrel after clashes between the US and Iran near the Strait of Hormuz, raising fears of further instability in the region’s fragile ceasefire. Meanwhile, US President Donald Trump warned the European Union that he would impose "much higher" tariffs on EU goods unless the bloc eliminates its tariffs on US products by July 4. Money markets are pricing in over 50 basis points of ECB tightening, or at least two rate hikes, by year-end, with a more than 75% chance of a first increase in June. Several ECB officials have recently signaled a higher likelihood of rate hikes due to persistent inflation pressures.

The euro climbed toward $1.18, its highest level since April 20, as the US dollar’s safe-haven demand waned amid growing hopes for a US-Iran agreement. Washington proposed a one-page memorandum to Iran, detailing steps to reopen the Strait of Hormuz and lift the US blockade on Iranian ports, with investors awaiting Tehran’s response. Money markets have reduced expectations for European Central Bank rate hikes, now pricing in about 50 basis points of tightening, or two rate hikes, by year-end, with a 75% chance of a first increase in June. ECB board member Piero Cipollone recently stated that the likelihood of a rate hike had risen due to persistent inflation pressures, a view shared by other policymakers earlier this month.