Euro Flat Amid US-Iran Standoff and Trade Hopes

The euro held at $1.17, remaining below the three-week highs seen last week, as investors assessed the impact of stalled US-Iran negotiations on monetary policy alongside optimism from the US-China summit. Expectations for a lasting US-Iran peace deal have faded, keeping the Strait of Hormuz effectively closed and amplifying inflationary pressures. Money markets now price in a nearly 90% chance of a June rate hike, with three increases almost fully priced in by the end of 2026. ECB official Martins Kazaks reinforced this outlook on Thursday, stating that the central bank will need to raise borrowing costs if rising crude prices feed into inflation expectations. Meanwhile, investors are monitoring Beijing, where optimism about the US-China summit’s potential to improve global trade relations remains. President Trump is expected to ask Chinese President Xi Jinping to help end the Iran war, despite earlier remarks that he did not need assistance.

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 80% 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.