Euro Slightly Up as Middle East Talks, Inflation Data Eyed

The euro held near $1.165 as investors processed mixed signals from Eurozone inflation data and the Middle East conflict. Euro-area inflation climbed to 3.2% in May, its highest in over two and a half years, driven by soaring energy costs tied to the war. However, core inflation accelerated more than expected to 2.5%, and services inflation rose to 3.5%, signaling broadening price pressures beyond energy. The data precedes next week’s European Central Bank meeting, with markets pricing in a 95% chance of a 25-basis-point rate hike, with two or possibly three increases expected this year. Meanwhile, ECB’s Isabel Schnabel cautioned on Monday that it’s premature to specify the number of rate hikes needed, while Lithuania’s Gediminas Šimkus suggested another hike after June is probable. Elsewhere, oil prices fell amid conflicting reports from US President Donald Trump and Israeli Prime Minister Benjamin Netanyahu on Lebanon talks, with Iran pausing US negotiations until clashes cease.

The euro edged higher to $1.165 amid conflicting signals about progress in ending the Middle East conflict and as investors awaited the release of Eurozone May inflation data later today. US President Donald Trump and Israeli Prime Minister Benjamin Netanyahu offered differing accounts of a call about the Lebanon conflict. Trump said he had urged both sides to stop fighting, while Netanyahu’s version was less definitive. The uncertainty follows reports that Iran had paused negotiations with the US, demanding an end to Lebanon clashes as part of any deal, though Trump claimed discussions with Iran were advancing quickly. Investors are also focused on May’s flash Eurozone inflation figures for clues on the economic impact of the Iran conflict. The data comes ahead of next week’s European Central Bank meeting, with markets pricing in a 95% chance of a 25-basis-point rate hike. Two such increases are expected this year, with a potential third.

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.