Euro Slides Toward April Lows Amid Middle East Tensions

The euro dropped toward $1.16, nearing its weakest level since April 7, as escalating Middle East tensions dashed hopes for a quick reopening of the Strait of Hormuz and raised concerns about the Eurozone’s economic outlook. Iran’s Tasnim News Agency reported on Monday that Tehran would halt negotiations with the US over Israeli strikes on Lebanon and fully close the Strait of Hormuz, accusing Washington of "violating the ceasefire on all fronts." The resulting surge in oil prices prompted investors to increase bets on European Central Bank interest rate hikes. Markets now expect at least two ECB rate increases this year, with an over 90% probability of the first hike occurring as early as next week. Investors are also awaiting this week’s Eurozone inflation report, following last week’s data showing accelerated EU-harmonized inflation in May for France, Italy, and Spain, while Germany saw a slowdown.

The euro began June at $1.165, largely unchanged from the previous session, as investors are closely monitoring developments in the Middle East conflict while processing a range of economic data from Europe. US and Iran are negotiating a ceasefire extension and Strait of Hormuz reopening, though progress is unclear, and Israel’s expanded ground assault in Lebanon has broken a truce. On the economic front, German retail sales declined in April for the fourth consecutive month, but slightly less than expected. Investors are also awaiting the Eurozone inflation report due this week, following last week’s data showing that EU-harmonized rates accelerated in May across France, Italy, and Spain, while Germany experienced a slowdown. Additionally, ECB minutes indicated that some policymakers would have supported an April rate hike if proposed, reinforcing expectations of a 25-basis-point increase at the June 11 meeting.

The euro held steady at $1.165 on the last trading session of May, on track for a 0.8% monthly loss against the USD. Investors analyzed fresh inflation data from Europe’s largest economies for clues on the ECB’s policy direction, while monitoring developments in US-Iran peace talks. Flash data revealed EU-harmonized inflation accelerated in May across France, Italy, and Spain, while Germany saw a slowdown, yet all remained well above the ECB’s 2% target. ECB minutes suggested some policymakers would have backed an April rate hike if proposed, reinforcing expectations of a 25-basis-point increase at the June 11 meeting. Meanwhile, White House sources said the US and Iran agreed on a 60-day ceasefire extension MoU to allow formal talks, though President Trump has not yet approved it. Elsewhere, geopolitical tensions rose after a Russian drone struck a building in Romania’s Galati overnight, during broader attacks on Ukrainian infrastructure near the border.