Euro Eases as Middle East Tensions Weigh on Outlook

The euro traded near $1.14, retreating from a near one-month peak reached on Tuesday, as investors grappled with escalating Middle East tensions and surging oil prices. These factors have amplified concerns about inflation’s impact on monetary policy and economic growth. The US military's continued strikes on Iran, following President Donald Trump’s reinstatement of a blockade on Iranian shipping, have further disrupted energy flows, adding to market uncertainty. The European Central Bank, which raised interest rates for the first time in three years in June, is widely expected to tighten policy again. Markets now fully price in a September rate hike, with another increase anticipated by spring 2027. However, recent remarks from policymakers like Piero Cipollone and Martin Kocher signal caution, as they see no clear evidence of second-round inflation effects yet.

The euro climbed to $1.145, its strongest level since June 19, supported by broad dollar weakness after softer-than-expected US inflation data eased pressure on the Federal Reserve to raise rates this year. Investors also reacted to escalating Middle East tensions and rising oil prices, which fueled concerns about inflation’s impact on monetary policy and economic growth. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping, heightening uncertainty over energy flows. Markets responded by pricing in further European Central Bank rate hikes, with money markets now expecting a deposit rate of 2.70% by December (up from 2.25%) and fully anticipating a September increase.

The euro held just below $1.14, nearing a one-year low against the US dollar, as investors reacted to escalating Middle East tensions, rising oil prices, and growing concerns about inflation’s impact on monetary policy and economic growth. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows. Markets responded by pricing in further European Central Bank rate hikes, with money markets expecting a deposit rate of 2.70% by December, up from 2.25%, and fully anticipating a September increase. In the US, Fed Governor Christopher Waller warned that the central bank may need to raise rates "in the near term" if inflation remains above the 2% target. Investors now await remarks from Federal Reserve Chair Kevin Warsh and US inflation data later today.