The euro hovered around $1.16, near its weakest level since January 16, as investors assessed the deepening conflict in the Middle East and mounting inflation risks. Regional tensions escalated following reports that US President Donald Trump had encouraged Iranian Kurdish forces in Iraq to target Iran, that Azerbaijan warned of retaliation after Iranian missile strikes, and that Kuwait was intercepting missiles and drones in its airspace.
The resulting surge in energy prices is expected to keep inflationary pressures elevated across Europe, bolstering expectations that the ECB may move toward a tighter monetary stance. Several policymakers cautioned on Thursday that, if the war in Iran persists and draws in additional countries, inflation in the euro area could rise even as economic growth weakens. Money markets currently imply roughly a 60% probability of an ECB rate hike in December and a 90% likelihood of at least one increase by June 2027.
