Euro Set for Weekly Gain on Middle East Deal Hopes

The euro held just below $1.16, on track for a 0.5% weekly gain, as a weaker USD, boosted by optimism over a potential Middle East peace deal, provided support. US President Donald Trump suggested a US-Iran agreement could be signed as early as this weekend, though Tehran has yet to confirm a final decision. Meanwhile, investors continued to digest the European Central Bank’s decision to raise interest rates for the first time in three years, a move aimed at preempting a broader inflation surge driven by rising fuel costs. Money markets now price in another rate hike, most likely in September, though July remains a possibility. The ECB also upwardly revised its inflation forecasts, projecting headline inflation at 3.0% for 2026 (up from 2.6%) and 2.3% for 2027 (up from 2.0%), with core inflation now expected at 2.5% for both years (revised up from 2.3% and 2.2%). Meanwhile, the growth outlook was slightly downgraded, with Eurozone GDP now forecast at 0.8% in 2026 and 1.2% in 2027.

The euro edged closer to $1.15, hovering near its lowest level since early April, after the European Central Bank delivered an expected 25-basis-point rate hike, its first since 2023. Policymakers cited surging energy costs and persistent inflation risks, exacerbated by the Iran conflict and disruptions to oil shipments through the Strait of Hormuz. The ECB also raised its inflation forecasts, projecting headline inflation at 3.0% for 2026 (up from 2.6%) and 2.3% for 2027 (up from 2.0%), with core inflation now expected at 2.5% for both years (revised up from 2.3% and 2.2%). Growth outlook was slightly downgraded, with Eurozone GDP now forecast at 0.8% in 2026 (down from 0.9%) and 1.2% in 2027 (down from 1.3%). Meanwhile, the dollar remained firm amid ongoing Middle East tensions, as repeated military strikes and diplomatic setbacks dimmed hopes for a US-Iran resolution.

The euro was little changed around $1.15, hovering near its lowest level in more than two months as broad USD strength continued to weigh on the common currency. The dollar remained supported by tensions in the Middle East, with repeated military strikes and diplomatic setbacks clouding the prospects for a resolution between the US and Iran. Investors are also awaiting the ECB's monetary policy decision, with the central bank expected to raise interest rates by 25bps, marking its first rate hike since 2023. Such a move would lift the deposit facility rate to 2.25%. The expected increase comes as inflationary pressures intensify following the energy shock triggered by the conflict with Iran, while the ECB's updated economic projections are likely to point to further inflation acceleration in the months ahead. Market participants will also closely scrutinize the central bank's forward guidance, with expectations that policymakers could deliver at least one additional rate hike this year.