Euro Flat as Markets Await US-Iran Deal, Fed Policy Signals

The euro held steady at $1.16 as investors awaited details of the US-Iran peace agreement and the Federal Reserve’s monetary policy outlook. Global sentiment improved on a sharp drop in oil prices, with markets on edge ahead of Friday’s signing of the US-Iran deal. The agreement follows a preliminary accord to end the conflict and reopen the Strait of Hormuz after nearly four months of war. Money markets have scaled back bets on ECB tightening, now pricing in less than 30 basis points of hikes this year, equivalent to just one increase. ECB policymaker Gediminas Šimkus reiterated on Wednesday that upside inflation risks still justify further tightening, expecting at least one more hike to keep inflation expectations in check. Later today, attention will shift to the Fed’s policy decision, with focus on updated FOMC projections and new Chair Kevin Warsh’s commentary on the interest rate outlook.

The euro rose to $1.16, its highest since early June, as investors embraced riskier assets after the US and Iran agreed to end their three-month conflict. The deal, lifting the US blockade and reopening the Strait of Hormuz, will be signed in Switzerland on Friday, though uncertainty lingers as markets await further details and the status of Iran’s nuclear program remains unresolved. Oil prices plunged, easing inflationary pressures and reducing expectations for rate hikes. Money markets now anticipate about 30 basis points of further ECB tightening this year, equivalent to one rate hike, down from nearly two before last Thursday’s increase. ECB President Christine Lagarde welcomed the news but warned of past dashed hopes and emerging second-round effects from the conflict. ECB’s Joachim Nagel added that oil supply recovery would take months, delaying any inflation relief.

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.