The Euro traded near 1.1650 against the US Dollar during early European hours on Monday, with little movement following the release of German Retail Sales data that showed a 0.3% month-on-month decline in April, slightly better than the expected 0.4% drop and matching March's revised figure of -0.3% [2][4][6]. On an annualized basis, retail sales also fell 0.3%, compared to a prior 0.2% decline [4][6]. Despite the upbeat macro data, the Euro failed to gain traction, with EUR/USD remaining nearly unchanged and EUR/GBP holding losses near 0.8655 [2][4][6]. No immediate reaction was observed in the Euro after the data release, as EUR/USD was down 0.04% on the day at 1.1655 [6].
Geopolitical tensions in the Middle East, particularly ongoing US-Iran conflicts and Israel's incursion into Lebanon, have revived demand for the safe-haven US Dollar, acting as a headwind for the Euro [2]. The US Dollar Index moved away from a two-week low amid persistent uncertainties and hawkish Federal Reserve expectations, with major US-Iran differences complicating diplomatic efforts to resolve the conflict [2]. Danske Bank noted that EUR/USD ended last week around 1.1650 after a sharp drop in oil prices, with US and Euro area yields both moving lower; the 10-year US Treasury yield fell to 4.43%, down more than 20 basis points from mid-May [5].
Inflation data from Germany, France, Italy, and Spain showed headline inflation rising mainly due to energy prices, with German regional CPI surprising on the downside [5]. Danske Bank analysts suggest that the ECB can take more time to assess the impact of the energy shock, making a June rate hike likely, but a second hike in July less probable [5]. Money market futures imply 32 basis points of tightening this year, with a quarter-point hike and roughly a 30% chance of a second [4].
Looking ahead, traders are focused on upcoming US ISM Manufacturing PMI and Nonfarm Payrolls data, as well as Eurozone HICP inflation figures and unemployment data, which are expected to confirm a still-soft but stable recovery in the euro area [2][5]. Danske Bank expects Euro area unemployment at 6.2% in April, in line with consensus, and the final manufacturing PMI for May to confirm the flash estimate at 51.4 [5].
BoE Governor Andrew Bailey commented that the UK central bank is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and UK growth stays weak, emphasizing the need to monitor Middle East developments closely [4].
CONCLUSION
The Euro remains stable near 1.1650, supported by slightly better-than-expected German retail sales but weighed down by geopolitical tensions and a firmer US Dollar. Market participants are awaiting key US and Eurozone economic data releases, while ECB rate hike expectations for June persist, though further tightening appears less likely. Overall, sentiment is cautious, with medium market impact expected as traders monitor developments in both economic indicators and geopolitical risks.