Euro Drops Near One-Year Low on Middle East Tensions

The euro opened the week at $1.14, nearing its one-year low from June, as investors responded to escalating Middle East tensions. Oil prices surged after another round of US strikes on Iran, with both sides disputing the status of the Strait of Hormuz. The US Central Command reported striking dozens of targets to weaken Iran’s ability to threaten shipping in the waterway. Iran, however, announced on Sunday that the strait would remain closed "until further notice." The uncertainty fueled inflation concerns, leading investors to bet on further European Central Bank interest rate hikes. The ECB had already raised rates in June for the first time since 2023. Now, markets expect two additional hikes over the next year, with the first likely in September, to counter inflation driven by rising fuel costs tied to the Iran conflict. ECB policymaker Yannis Stournaras warned on Friday that the central bank is "back to square one" in its battle against high inflation in the eurozone.

The euro climbed to $1.144, recovering from June’s one-year low, as expectations grow for further European Central Bank interest rate hikes. The ECB raised rates at its June meeting for the first time since 2023, and investors now anticipate two more hikes over the next year, with the first likely in September, to counter inflation driven by rising fuel costs from the Iran conflict. ECB policymaker Yannis Stournaras stated on Friday that the central bank is "back to square one" in its fight against high inflation in the eurozone after new US-Iran hostilities pushed oil prices higher. Earlier this week, Brent crude hit two-week highs after US President Donald Trump declared the Iran ceasefire over, though he noted Tehran’s continued interest in a deal. Politically, Germany approved a 2027 budget draft with €555.4 billion in spending and increased borrowing, while in France, far-right leader Marine Le Pen confirmed her 2027 presidential bid, with polls favoring her National Rally.

The euro edged up to $1.143, attempting to rebound from one-year lows hit in June, as expectations rose for another European Central Bank interest rate hike in September. On Wednesday, Brent crude reached two-week highs following renewed US-Iran strikes, with US President Trump declaring the Iran ceasefire over. However, he also noted that Iran still wants to make a deal "badly," offering some hope for revived negotiations. Traders are now pricing in over 30 basis points of additional ECB tightening this year, signaling at least one potential rate hike. Politically, Germany’s cabinet approved a 2027 budget draft, outlining €555.4 billion in spending and increasing borrowing to €203.6 billion, up from earlier estimates. In France, far-right leader Marine Le Pen confirmed her 2027 presidential bid, with polls favoring her National Rally, while uncertainty persists over President Macron’s successor.