The euro weakened against the U.S. dollar, with EUR/USD trading back near 1.18 as the pair resumed a mild downward path and consolidated recent war-related swings. Forecasts from Danske Research and major banks point to only limited moves in the near term, with markets now pushing back expectations for European Central Bank (ECB) rate hikes to the summer.
Ecb seen on hold in april despite inflation above target
Final euro area inflation data showed headline Harmonised Index of Consumer Prices (HICP) at 2.6% year on year, slightly above the flash estimate of 2.5%. Core inflation was confirmed at 2.3%.
The figures, while above the ECB’s 2% target, are broadly in line with earlier releases and, on their own, support keeping rates unchanged at the April meeting. Central bank sources indicate that Governing Council members favour a pause to assess the economic fallout of the conflict involving Iran and the broader Middle East.
Governing Council member Isabel Schnabel said the ECB can take “additional time” to evaluate the latest shocks, arguing that, having previously brought inflation back toward target before the conflict, the Bank is in a “relatively favorable” position to avoid over-tightening and further burdening the regional economy.
Market reprices ecb path as inflation shock seen as geopolitical
Money markets have scaled back expectations for an April move, now pricing in only about 5 basis points of additional tightening. Danske Research has shifted its projected rate hikes to June and July, while other large institutions such as JPMorgan now look for hikes in June and September instead of April and July.
The recalibration reflects a view that the current inflation spike is driven largely by geopolitics rather than domestic overheating. According to Eurostat, euro area inflation rose to 2.6% in March from 1.9% in February, mainly due to a sharp reversal in energy prices. Energy costs jumped 5.1% year on year in March after a 3.1% decline the month before, a move widely linked to the Middle East conflict and its impact on oil markets.
Policy makers face a dilemma: higher energy-driven inflation would normally argue for faster tightening, but the same conflict is weighing on growth and confidence. The International Monetary Fund has cut its global growth forecast for this year to 3.1%, down 0.2 percentage points, citing the war’s economic toll.
EUR/USD outlook: near-term consolidation, longer-term euro upside
EUR/USD has largely reversed its initial war-related losses over the past month and is now stabilising around 1.18. Danske Research’s one- and three-month projections both sit at 1.18, implying a period of relative stability as traders wait for clearer signals on inflation, growth and central bank policy.
In the near term, the exchange rate is expected to oscillate around current levels, with major moves more likely to be triggered by external shocks than by imminent policy changes from the ECB or the Federal Reserve.
Over a longer horizon, Danske expects the euro to strengthen against the dollar, supported by three main factors:
- narrowing interest rate differentials as the ECB continues to raise rates while the Federal Reserve eventually cuts
- a gradual normalisation in global oil prices as supply conditions stabilise
- persistent inflation trends in the United States that could limit the Fed’s ability to maintain an aggressive stance without harming growth
Focus shifts to geopolitics and energy as key drivers
With the ECB in wait-and-see mode and EUR/USD boxed near 1.18, attention is turning to geopolitical developments and their impact on energy markets and risk sentiment.
- A de-escalation of the Middle East conflict and easing oil prices could temper inflation concerns, reduce demand for the dollar as a safe haven, and provide a supportive backdrop for the euro and for assets tied to global risk appetite.
- Further military escalation, by contrast, would likely push energy prices higher, intensify pressure on the ECB to act, and reinforce safe-haven flows into the dollar, weighing on the euro and lifting EUR/USD volatility.
For traders, the current backdrop points to a tightly balanced environment: policy makers are cautious, growth risks are rising, and energy markets remain highly sensitive to headlines, leaving the euro-dollar pair anchored for now but vulnerable to sudden shifts in geopolitical risk.
Curious how macro trends move crypto too? Explore fiscal policy’s impact on digital assets in our in-depth guide.
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