The euro strengthened toward $1.164, supported by cautious optimism over a potential resolution in the Middle East and positioning ahead of next week’s European Central Bank meeting. Reports that Israel and Lebanon had agreed to implement a ceasefire and halt hostilities fueled hopes for a broader agreement that could help de-escalate tensions in the US-Israeli standoff with Iran. Still, Tehran denied any recent progress in interim peace talks with Washington, and fighting persisted in Lebanon. At the same time, the Republican-controlled US House voted to block further US military action against Iran.
On the monetary policy front, markets are now almost fully pricing in a 25-basis-point rate increase by the ECB at its June 11 meeting, with a total of two to three hikes expected over the course of the year. The shift in expectations follows data showing that euro-area inflation rose to 3.2% in May, its highest level in more than two and a half years. Core inflation also quickened to 2.5%, while services inflation climbed to 3.5%, indicating that price pressures are broadening beyond the energy sector.
