Euro Holds Steady as Middle East Tensions Weigh

The euro stabilized at $1.154, remaining close to its weakest level in over two months, as Middle East tensions escalated, with the US and Iran exchanging fresh strikes. President Donald Trump stated that Iran is taking "too long" to negotiate a peace deal and will now "pay the price," while Iranian Parliament Speaker Mohammad Bagher Ghalibaf declared on Wednesday that Tehran would respond "decisively and without delay" to any aggression. Investors are also preparing for the European Central Bank’s policy meeting on Thursday, where a 25-basis-point rate hike, the first move in a year, is widely anticipated, as the Israel-Iran conflict sparked an energy crisis and increased inflationary pressures. Markets will closely watch President Lagarde’s press conference for signals on future policy direction.

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.