The euro extended its gains above $1.16 as investors positioned for a likely European Central Bank interest rate hike next week, while retaining cautious optimism over a possible de-escalation in the Middle East. Markets are now almost fully pricing in a 25-basis-point increase at the ECB’s June 11 meeting, with a total of two or potentially three rate hikes anticipated 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 and services inflation also accelerated, indicating that price pressures are broadening beyond the energy sector. Still, uncertainty persists as policymakers struggle to reconcile elevated inflation with weak economic growth.
ECB policymaker Isabel Schnabel, seen as one of the more hawkish voices on the Governing Council, warned on Monday that it is still too early to determine how many further rate increases will be required. At the same time, US–Iran talks continued, and clashes between Lebanon and Israel carried on despite a pending US-brokered ceasefire agreement.
