The euro is holding firm against the US dollar, trading back around levels seen before the recent Middle East flare-up, as calmer oil prices and resilient equity markets temper geopolitical anxiety. The currency’s latest move has taken it to a six-week high near $1.18, reinforcing a broader risk-on tone across global markets.
Rate hike in April unlikely, focus shifts to June and beyond
The European Central Bank (ECB) is widely seen as unlikely to raise interest rates at its April meeting, but current market pricing still implies a potential move by June if crude oil remains contained and equities continue to hold up.
Further out, traders now expect just over two 25-basis-point rate hikes in 2026, a clear scaling back from the more than three hikes that had been priced in earlier in April when tensions in the Middle East were more acute.
Lagarde signals caution but avoids steering near-term pricing
ECB President Christine Lagarde said the economic impact of the regional conflict is currently tracking between the central bank’s baseline and adverse scenarios, stressing that Europe remains outside the main center of Middle East tensions.
Her latest comments offered no overt attempt to steer near-term market pricing ahead of the blackout period before the next policy meeting. That restraint follows a gradual softening of expectations for an April move, suggesting policymakers may prefer to wait longer before considering further tightening.
Lagarde repeated that the Governing Council must remain agile and data-dependent. The recent appreciation of the euro, alongside falling energy costs, has eased some immediate inflation concerns and given the ECB more room to maneuver.
Oil retreat eases geopolitical premium
The euro’s strength has been underpinned by a sharp pullback in crude prices. Brent futures extended recent losses to trade around $95 per barrel after a drop of more than 4%, as hopes for de-escalation and peace negotiations reduced the geopolitical risk premium built into energy markets.
Prices are now well below the levels above $100 seen just last week, signaling a rapid reassessment of worst-case scenarios for regional supply disruptions.
European stocks extend gains as risk appetite improves
European equity markets have echoed the more optimistic tone. The Euro Area Stock Market Index (EU50) has climbed to a six-week high, up 4.33% over the past month and 20.55% compared with a year ago.
This resilience in risk assets, combined with the euro’s advance, contrasts with the reaction seen in the early phase of the Ukraine crisis, when the single currency was around 4% lower after seven weeks. According to analysts, that difference underscores how the current conflict is being priced as more contained for the European economy.
Policy flexibility grows as geopolitical worries ease
The relative stability of the euro has, according to analysts, given the ECB’s Governing Council more flexibility than initially expected when hostilities first escalated. With oil off its highs and equity markets firm, the pressure for an immediate policy response has diminished.
Traders now see the ECB’s stance as more patient, with the central bank likely to balance the need to control inflation against the risk that another flare-up in regional tensions could quickly reintroduce price pressures.
Technical levels and key risks to watch
For market participants, attention is turning to whether the euro can hold above a key technical zone around $1.1670–$1.1690, where a cluster of moving averages has shifted from resistance to support. Maintaining that support would reinforce the bullish tone for the currency.
The main risk remains the durability of any ceasefire and the outcome of diplomatic efforts. A breakdown in talks or a renewed escalation in the Middle East could rapidly drive oil higher, unsettle equity markets, and push the ECB back toward a more aggressive inflation-fighting stance.
Conversely, continued stability or further declines in crude, combined with steady equity markets, would likely support the ECB’s current wait-and-see approach into the middle of the year.
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