Euro Remains Under Pressure as US-Iran Talks Stall

The euro fell to $1.17, pulling back from near three-week highs, as investors weighed the impact of stalled US-Iran negotiations and mounting expectations for further ECB rate hikes. Fears over the fragile ceasefire and persistent inflation have led markets to price in three ECB rate increases by year-end, with an over 85% chance of the first hike in June. ECB President Christine Lagarde reiterated on Friday that the central bank is prepared to act swiftly if necessary, emphasizing that the euro area’s economic position is now stronger than before Russia’s invasion of Ukraine. Meanwhile, German wholesale prices jumped 6.3% year-on-year in April, the highest since February 2023, amid ongoing Middle East tensions. Eurostat data also confirmed that the Eurozone economy grew by just 0.1% in Q1 2026, its weakest expansion since Q2 2025.

The euro weakened toward $1.17, retreating from near three-week highs, as investors assessed the impact of escalating US-Iran tensions and growing expectations of further ECB rate hikes. Brent crude oil prices climbed above $105 a barrel after US President Trump rejected Iran’s latest peace proposal as unacceptable. Money markets now price in three ECB rate hikes this year, with an over 86% chance of the first increase in June. ECB President Christine Lagarde reaffirmed on Friday that the central bank stands ready to act swiftly if needed, noting the euro area’s economic position is stronger now than before Russia’s invasion of Ukraine. On the economic data front, Germany’s ZEW Indicator of Economic Sentiment improved by seven points to -10.2 in May, rebounding from a more than three-year low and exceeding market expectations. Although the increase suggests a more optimistic outlook, the indicator remains negative as investors await a swift resolution to the Iran conflict.

The euro remained above $1.175, close to its highest level in three weeks, as investors considered the impact of rising tensions between the US and Iran alongside growing expectations of additional ECB rate hikes. Brent crude surpassed $105 per barrel following President Trump’s rejection of Iran’s latest peace proposal as “totally unacceptable.” The future of the Strait of Hormuz is still uncertain, after reports suggested Iran had proposed diluting some of its enriched uranium and sending the remainder to a third country, a claim Iran denied. Money markets are now anticipating at least two ECB rate increases this year, with a probability exceeding 78% for the first hike in June. ECB President Christine Lagarde reiterated on Friday that the central bank is prepared to take swift action if necessary, emphasizing that the euro area’s economic position is stronger now than it was before Russia’s invasion of Ukraine.