Euro Near Early-April Lows as Weak PMI Signals Contraction

The euro erased early gains to trade around $1.16, close to its weakest level since early April, as investors assessed weak S&P Global flash PMI data and Middle East developments. The survey revealed that 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. S&P Global also cautioned that the data points to inflation nearing 4% in the coming months. At the same time, crude prices remained close to four-year highs amid doubts that a US–Iran deal can be reached soon or that traffic through the Strait of Hormuz will be fully restored. The European Central Bank, which held interest 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.

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.