Euro Edges Up as ECB Rate Hike Looms

The euro rose slightly to $1.154, attempting to rebound from over two-month lows, as easing Israel-Iran tensions temporarily reduced fears that weekend attacks could derail US-led Middle East peace efforts. Attention now turns to the European Central Bank’s Thursday policy meeting, where a 25-basis-point rate hike, the first move in a year, is widely anticipated, following the conflict’s impact on energy prices and inflation. Markets will also parse President Lagarde’s press conference for clues on further action. This expected hike follows euro-area inflation reaching its highest level in over two and a half years. Money markets are pricing in about 70 basis points of tightening by year-end, implying one more quarter-point increase and a greater than 70% chance of a third.

The euro steadied just above $1.15, close to its weakest level since April 3, as renewed Middle East tensions stoked fears of a prolonged Iran conflict, exacerbating inflation concerns and dampening growth prospects. Brent crude surged over 4% after Iran and Israel exchanged missile strikes, despite calls from President Trump for both sides to cease hostilities and pursue peace talks. Investors also braced for a likely European Central Bank rate hike this week, with traders now pricing in three increases for the ECB and fully expecting the first hike as soon as June 11. This follows data showing euro-area inflation rose to 3.2% in May, its highest in over two and a half years. However, uncertainty lingers after Eurozone GDP figures were revised to show a contraction in Q1 2026, the first since late 2022 and the steepest since mid-2020.

The euro erased early gains to trade below $1.16, hitting its lowest level since April 6 and heading for a 0.7% weekly loss, as investors flocked to the US dollar after stronger-than-expected US jobs data. Nonfarm payrolls surged by 172,000 in May, nearly double the forecasted 85,000, prompting markets to fully price in a Federal Reserve interest rate hike by year-end. At the same time, investors braced for a likely European Central Bank rate hike next week, while cautiously eyeing potential progress in Middle East resolution efforts. Markets now see a near-certain 25-basis-point ECB rate increase at the June 11 meeting, with two or possibly three hikes 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. However, uncertainty lingers after Eurozone GDP figures were revised to show a contraction in Q1 2026, the first since late 2022 and the steepest since mid-2020.