Euro Rebounds as Investors Digest PMI Data

The euro climbed to $1.163, recovering from one-month lows, as investors digested S&P Global flash PMI data and Middle East developments. The survey revealed the euro area economy unexpectedly contracted in May at the fastest pace since late 2023, with a war-driven surge in living costs suppressing service demand and pushing input price inflation to a three-year high. France recorded its sharpest contraction since 2020, while Germany’s output fell for a second consecutive month. S&P Global also cautioned that the data points to inflation nearing 4% in the coming months. The European Central Bank, which held rates steady last month but discussed a potential increase, has signaled, both publicly and privately, that a rate hike could come as early as June. Elsewhere, Brent crude prices stayed elevated after President Donald Trump said Iran negotiations were in the "final stages" but warned of renewed attacks if Tehran rejected his terms.

The euro dropped below $1.16, its lowest since early April, as investors prepared for sustained high energy prices driven by the Middle East conflict, which threatens to stoke inflation and weigh on economic growth. Brent crude held near four-year highs with US-Iran talks to reopen the Strait of Hormuz stalled. Expectations for ECB tightening have intensified in recent weeks, with markets pricing in an over 80% chance of a 25-basis-point rate hike next month and two more by year-end. Economic data underscores the strain: Eurozone growth slowed to 0.1% in Q1 2026, the weakest since Q2 2025, amid Middle East energy constraints, while inflation climbed to 3% in April, the highest since September 2023 and well above the ECB’s 2% target. Investors now await Thursday’s flash S&P Global PMI surveys for further policy signals.

The euro slipped to $1.163, hovering near one-month lows, as investors braced for prolonged high energy prices due to the war in the Middle East, which risks fueling broader inflation and dampening economic growth. Brent remained close to a four-year high after US President Trump delayed further strikes on Iran but ordered the military to prepare for a "full, large-scale assault" if negotiations fail. Market expectations for European Central Bank tightening have moderated slightly, though traders still price in an 80% chance of a 25-basis-point rate hike next month, with two more likely by year-end. Recent data underscored the challenges: Eurozone growth slowed to 0.1% in Q1 2026, the weakest since Q2 2025, due to energy supply constraints tied to the Middle East conflict, while inflation rose to 3% in April, the highest since September 2023 and well above the ECB’s 2% target. Investors now look to Thursday’s flash S&P Global PMI surveys for further monetary policy clues.