The euro traded steady above 1.1800 against the U.S. dollar in early Asian dealings on Thursday, changing hands near 1.1805 as easing tensions in the Middle East supported demand for risk‑sensitive assets.
Geopolitics and oil prices support the euro
Reports that Washington and Tehran are close to extending a ceasefire and may resume diplomatic talks on a longer‑term peace arrangement boosted broader risk appetite.
At the same time, oil prices edged lower on expectations that a wider regional de‑escalation could keep trade flows through the Strait of Hormuz more stable. Softer oil prices helped temper some inflation worries and added to demand for the shared currency.
Ecb expected to stay on hold, but markets price in hikes
Officials at the European Central Bank are widely expected to leave policy rates unchanged at their April meeting.
Earlier this week, President Christine Lagarde stressed that the ECB remains flexible on rates and is not committed to a particular direction. Despite that neutral tone, many market participants still expect two 25‑basis‑point rate increases before year‑end, reflecting concern over persistent price pressures.
Trade and inflation data from across the euro area remain key for rate expectations. The four largest economies—Germany, France, Italy and Spain—account for roughly three‑quarters of the bloc’s total GDP, making their figures central for gauging the probable path of policy.
Euro’s dominant role in global currency trading
The euro remains the second most traded currency worldwide. In 2022 it represented about 31% of all foreign exchange transactions, with an average daily turnover above 2.2 trillion U.S. dollars.
The eur/usd pair alone makes up nearly 30% of global currency market activity, underlining its role as a benchmark for global risk sentiment and policy expectations on both sides of the Atlantic.
Diverging inflation trends complicate policy outlook
The broader backdrop for the shared currency is mixed, as geopolitical relief collides with rising inflation in both the euro area and the United States.
In the U.S., annual inflation jumped to 3.3% in March, the highest reading since May 2024 and a sharp move up from 2.4% in February. The increase was driven mainly by higher energy costs and has reinforced the Federal Reserve’s cautious stance.
The Fed left its benchmark rate unchanged in a 3.50% to 3.75% range at its March meeting. While policymakers still signal one rate cut before the end of 2026, the timing is unclear, and officials highlighted the uncertain economic impact of recent Middle East developments.
In the euro area, annual inflation rose to 2.5% in March from 1.9% in February, pushing it further above the ECB’s 2% target. Here too, the main driver was energy, which posted its first annual increase in nearly a year amid regional instability.
Ecb holds rates as confidence in Germany slumps
Despite the pickup in headline inflation, the ECB’s Governing Council left key interest rates unchanged at its 19 March meeting, arguing that more time is needed to assess incoming data. The central bank now projects inflation averaging 2.6% in 2026, before gradually moving closer to target thereafter.
This decision comes as economic sentiment in Germany, the bloc’s largest economy, deteriorates sharply. The ZEW Indicator of Economic Sentiment saw one of its steepest monthly falls on record in March, dropping to -0.5 from 58.3 in February and undershooting all forecasts. The plunge signals deep concern among financial analysts about the potential economic fallout from recent geopolitical strains.
Focus shifts to central banks’ next moves
Market operators now face a complex mix of factors: a tentative de‑escalation in the Middle East that has lifted risk appetite, against the more sobering reality of rising inflation on both sides of the Atlantic and weakening confidence in key euro area economies.
The future path of eur/usd is likely to hinge on which central bank—the Fed or the ECB—is seen as under greater pressure to respond to these price developments in upcoming policy meetings.
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