The Euro has come under pressure, with the EUR/USD pair trading around 1.1620 during the early Asian session on Thursday, reflecting a decline of approximately 0.03% on the day [1][2]. This weakness is attributed to escalating geopolitical tensions after the US military conducted new strikes in Iran, targeting a military site that posed a threat to US forces and commercial traffic in the Strait of Hormuz [2]. Additionally, multiple Iranian drones were intercepted and shot down by the US military, and three explosions were reported east of Bandar Abbas, with air defenses activated for several minutes, according to Fars News Agency [2].
The heightened tensions in the Middle East and the lack of progress in US-Iran peace negotiations have increased demand for safe-haven assets like the US Dollar, exerting downward pressure on the Euro [2]. Despite these headwinds, hawkish commentary from European Central Bank (ECB) officials has provided some support for the shared currency. ECB Chief Economist Philip Lane emphasized that even if the initial energy shock begins to ease, second-round effects on inflation will persist, and the Middle East conflict may have lasting impacts even after the acute phase ends [1]. Lane also noted that a prolonged conflict could prompt shifts in optimal diversification strategies [1].
Other ECB policymakers echoed a firm stance on inflation. Francois Villeroy de Galhau stated that the central bank "will do what is necessary" to keep inflation on target [2], while Isabel Schnabel argued for raising interest rates in June, regardless of the outcome of ongoing peace talks with Iran, citing the prolonged nature of the conflict and the spillover of high energy prices into the broader economy [2]. Financial markets have fully priced in two hikes in the ECB's 2% deposit rate and see a nearly 50% chance of a third move over the next year, though economists are more cautious, expecting just two hikes followed by a cut in mid-2027, according to a Reuters poll [2].
The market context underscores the Euro's vulnerability to geopolitical developments and the balancing effect of the ECB's hawkish rhetoric. The 1.1620 level is identified as notable support for EUR/USD, with a break below potentially opening the door for further declines [2].
CONCLUSION
The Euro remains under pressure amid escalating US-Iran tensions and persistent inflation risks highlighted by ECB officials. While safe-haven flows support the US Dollar, the ECB's hawkish stance may help limit the Euro's losses. Market participants are closely watching geopolitical developments and upcoming inflation data for further direction.