Euro Steady on Middle East Tensions and ECB Rate Hike Expectations

The euro held steady at $1.16 as investors weighed mixed signals from the Middle East conflict and prepared for the European Central Bank’s meeting next week. Iran said it targeted a US command ship in the Gulf of Oman, while the Republican-controlled House voted to end US military action against Iran, a move that represents a rare challenge to President Trump’s administration. Israel and Lebanon also reached a conditional ceasefire, though Prime Minister Netanyahu warned of potential further strikes. On the monetary policy front, markets are now pricing in a near-certain 25-basis-point ECB rate hike at the June 11 meeting, with two or possibly three increases expected this year. This follows data showing Euro-area inflation rose to 3.2% in May, its highest in over two and a half years, driven by surging energy costs tied to the war. Core inflation also accelerated to 2.5%, and services inflation climbed to 3.5%, indicating broadening price pressures beyond energy.

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.