The Euro remained largely unchanged on Thursday, near the lower end of its recent trading range ahead of the European Central Bank (ECB) meeting widely expected to deliver its first interest rate hike in almost three years.
Meanwhile, broader markets stayed cautious amid ongoing geopolitical concerns in the Gulf.
The single currency edged slightly higher to $1.1551 but was still closer to its mid-March lows around $1.14 than its mid-April peak above $1.18, Reuters reports.
The Euro’s drop back toward the bottom of its post–Middle East conflict trading range was driven by traders revising expectations for a more aggressive Federal Reserve policy. This adjustment effectively brought market pricing for the Fed in line with earlier shifts in European Central Bank expectations that had already moved during the conflict, Reuters reports.
If ECB President Christine Lagarde fails to indicate that another interest rate increase is likely in the near term, the Euro may see slight downside pressure. At the same time, it could be challenging to drive a more hawkish market reaction, as traders are already pricing in nearly three additional rate hikes for the year.
Moreover, the British Pound and Japanese Yen both edged slightly higher against the US Dollar on Thursday, although overall trading remained subdued. Sterling stood at $1.3381, while the Yen was trading at 160.5 per Dollar, a level that has kept markets alert to the risk of potential intervention by Japanese authorities in Tokyo.
Traders also kept a close watch on developments in the Gulf, where the US and Iran exchanged airstrikes for a second consecutive day. President Donald Trump warned of further military action unless Tehran quickly agrees to a peace deal, heightening concerns over the escalating tensions.
Furthermore, investors were also digesting data released the previous day showing that the US Consumer Price Index rose 4.2% over the 12 months to May, the strongest annual increase since April 2023.
However, core CPI increased by just 0.2% on the month, slowing from a 0.4% rise in April, which helped reinforce expectations that inflationary pressures from the energy shock may remain contained.
Despite this, markets have now fully priced in a 25-basis-point interest rate hike by December, marking a significant shift from earlier expectations of two rate cuts this year before the Iran conflict escalated at the end of February.
The Federal Reserve is expected to keep interest rates unchanged at next week’s policy meeting, which will be Kevin Warsh’s first as Fed chair. A clear majority of economists in a Reuters poll also anticipate that the US central bank will maintain rates at current levels through the remainder of 2026.