US surprise attack + ECB hawkish stance: Euro struggles between bulls and bears
2026-05-26 09:15:50
The euro traded in a narrow range against the US dollar in early Asian trading on Tuesday (May 26), currently hovering around 1.1635. The euro's gains against the dollar were hampered by uncertainty surrounding a US-Iran peace agreement, which boosted safe-haven currencies.
According to media reports, the U.S. military conducted a "self-defense strike" in southern Iran on Monday. A spokesperson for the U.S. Central Command stated that the strikes targeted missile launch sites and Iranian vessels attempting to lay mines. The U.S. military stated that it would exercise restraint during the ceasefire while protecting its forces.
Earlier on Monday (May 25), media reports indicated that US President Trump stated that negotiations with Iran to end the conflict and reopen the Strait of Hormuz were "progressing well." Trump further emphasized on social media that the US and Iran would either "make a great and significant deal, or there will be no deal," and issued a strong warning: if no agreement is reached, "we'll go back to the front lines, back to fighting, but on a bigger scale than ever before." Despite Trump's positive signals, Iran's statements were more cautious.
On the 25th, a spokesperson for the Iranian Foreign Ministry made it clear that although Iran and the United States had reached a consensus on most issues, this did not mean that an agreement would be signed soon, because the United States had "systemic instability and reversals" in its policy-making.
Traders will be closely monitoring developments regarding the US-Iran peace agreement. Currently, significant differences remain between the two sides on core issues: Iran insists that the management of the Strait of Hormuz is a matter for the littoral states themselves and emphasizes that the fee collected is a "navigation service fee," not a "passage fee"; while the US demands unconditional opening of the strait. More crucially, neither side has made any commitments regarding the nuclear issue or highly enriched uranium in the initial draft agreement.
Any signs of escalation in the Middle East could boost safe-haven currencies like the US dollar and put downward pressure on the euro against the dollar. In fact, even as negotiations were underway, the US military conducted a "self-defense strike" in southern Iran on Monday, targeting missile launch sites and Iranian vessels attempting to lay mines, indicating that the tense "fighting while negotiating" situation continues.
Several European Central Bank (ECB) officials have recently spoken out, pointing to rising inflationary pressures and reinforcing expectations of a June rate hike. Austrian central bank president Koch explicitly warned that unless the Middle East conflict eases, there is "no choice but to raise interest rates"; Bundesbank president Nagel pointed out that the Eurozone is deviating from its baseline scenario; and Executive Board member Schnabel believes that the current transmission of energy inflation to core inflation may be faster. The European Commission has significantly raised its 2026 Eurozone inflation forecast from 1.9% to 3.0%, while lowering its economic growth forecast. Although the May composite PMI unexpectedly fell to 47.5, indicating economic contraction, input price inflation accelerated to a three-and-a-half-year high, exhibiting a "stagflation" pattern. Financial markets are currently pricing in an 85% probability of a 25 basis point rate hike by the ECB in June, and have already fully priced in expectations of two rate hikes before the end of the year.
However, dissenting voices exist in the market. Analysts at Natixis believe that market expectations for interest rate hikes are "too high" after weak Eurozone economic data, and pricing remains aggressive. State Street Global Advisors also advises the ECB to "pause its actions," pointing out that the services PMI shows signs of demand destruction, and companies' ability to pass on high energy costs may be limited. Overall, geopolitical tensions driving up energy prices are forcing the ECB to act, and a June rate hike is almost a market consensus. However, the "stagflation" pattern of weak economy and high inflation presents the ECB with a difficult trade-off—while a rate hike could curb inflation expectations, it could also further suppress the already fragile economic recovery.
European Central Bank (ECB) official Olaf Sleipen will speak on Tuesday, and the market is focused on his policy stance. Sleipen, who took over as governor of the Dutch central bank and joined the ECB Governing Council in April, will be giving his first public speech, drawing significant attention. He recently warned that stablecoins pegged to the dollar could threaten European financial stability and explicitly stated that the ECB's upcoming policy discussions will revolve around "raising interest rates or keeping them unchanged"—a statement that itself suggests a June rate hike is not a certainty. If he adopts a hawkish stance, echoing officials like Kocher and Nagel, it will further solidify expectations of a June rate hike (currently priced in by the market at nearly 85%); a more cautious approach could dampen overly high expectations of a rate hike.
Minneapolis Federal Reserve President Neel Kashkari will also speak on the same day. As a relatively dovish official within the Fed, he has previously stated that uncertainty surrounding trade and immigration policies introduces uncertainty into the Fed's interest rate adjustments, favoring a postponement of policy changes until after September. Kashkari's comments on the inflation outlook are crucial ahead of the release of the US April PCE data (expected to be 3.8% year-on-year). If he acknowledges widening inflationary pressures or remains open to rate hikes, it will be seen as a hawkish signal, potentially strengthening the dollar; if he insists on a "temporary inflation" stance or emphasizes uncertainty, it may ease market expectations for aggressive rate hikes by the Fed.
The speeches by the two officials will create a contrast between "Euro hawkish, US dovish" and "Euro dovish, US hawkish," potentially exacerbating the policy divergence between Europe and the US. Current market pricing indicates an nearly 85% probability of a June rate hike by the European Central Bank, while the probability of the Federal Reserve maintaining its current rate is as high as 97.3%. If Sleppen leans hawkish and Kashkari leans dovish, the euro may receive support; conversely, the euro may face further downward pressure against the US dollar. The market will closely monitor the short-term impact of their statements on exchange rates and rate hike expectations.
In summary, the euro is currently pressured by uncertainty surrounding the US-Iran situation. The US military strikes in southern Iran have reignited geopolitical risks, boosting demand for the dollar as a safe haven. However, strong expectations of a June rate hike by the European Central Bank (with a probability of nearly 85%) may provide some support for the euro. In the short term, the euro's movement against the dollar will depend on substantial progress in US-Iran negotiations, the evolution of the Middle East situation, and further clarification of policy signals from central banks in Europe and the US.
From the daily chart, the euro is currently trading around 1.1635 against the US dollar, in a consolidation phase after rebounding from recent lows, with multiple technical indicators showing neutral to weak signals.
(Euro/USD daily chart, source: FX678)
Regarding the moving average system, the short-term moving averages MA20 (1.1683) and MA50 (1.1658) are above the current price, forming short-term resistance; MA100 (1.1697) and MA200 (1.1680) are also above the current price. This arrangement of "price below all major moving averages" indicates that the euro/dollar exchange rate is under significant short-term pressure and is in a weak consolidation pattern.
At 09:14 Beijing time, the euro was trading at 1.1639/40 against the US dollar.
According to media reports, the U.S. military conducted a "self-defense strike" in southern Iran on Monday. A spokesperson for the U.S. Central Command stated that the strikes targeted missile launch sites and Iranian vessels attempting to lay mines. The U.S. military stated that it would exercise restraint during the ceasefire while protecting its forces.
US-Iran situation: Trump says negotiations are "going well," but military strikes continue.
Earlier on Monday (May 25), media reports indicated that US President Trump stated that negotiations with Iran to end the conflict and reopen the Strait of Hormuz were "progressing well." Trump further emphasized on social media that the US and Iran would either "make a great and significant deal, or there will be no deal," and issued a strong warning: if no agreement is reached, "we'll go back to the front lines, back to fighting, but on a bigger scale than ever before." Despite Trump's positive signals, Iran's statements were more cautious.
On the 25th, a spokesperson for the Iranian Foreign Ministry made it clear that although Iran and the United States had reached a consensus on most issues, this did not mean that an agreement would be signed soon, because the United States had "systemic instability and reversals" in its policy-making.
Traders will be closely monitoring developments regarding the US-Iran peace agreement. Currently, significant differences remain between the two sides on core issues: Iran insists that the management of the Strait of Hormuz is a matter for the littoral states themselves and emphasizes that the fee collected is a "navigation service fee," not a "passage fee"; while the US demands unconditional opening of the strait. More crucially, neither side has made any commitments regarding the nuclear issue or highly enriched uranium in the initial draft agreement.
Any signs of escalation in the Middle East could boost safe-haven currencies like the US dollar and put downward pressure on the euro against the dollar. In fact, even as negotiations were underway, the US military conducted a "self-defense strike" in southern Iran on Monday, targeting missile launch sites and Iranian vessels attempting to lay mines, indicating that the tense "fighting while negotiating" situation continues.
European Central Bank: Hawkish Stance May Limit Euro Decline
Several European Central Bank (ECB) officials have recently spoken out, pointing to rising inflationary pressures and reinforcing expectations of a June rate hike. Austrian central bank president Koch explicitly warned that unless the Middle East conflict eases, there is "no choice but to raise interest rates"; Bundesbank president Nagel pointed out that the Eurozone is deviating from its baseline scenario; and Executive Board member Schnabel believes that the current transmission of energy inflation to core inflation may be faster. The European Commission has significantly raised its 2026 Eurozone inflation forecast from 1.9% to 3.0%, while lowering its economic growth forecast. Although the May composite PMI unexpectedly fell to 47.5, indicating economic contraction, input price inflation accelerated to a three-and-a-half-year high, exhibiting a "stagflation" pattern. Financial markets are currently pricing in an 85% probability of a 25 basis point rate hike by the ECB in June, and have already fully priced in expectations of two rate hikes before the end of the year.
However, dissenting voices exist in the market. Analysts at Natixis believe that market expectations for interest rate hikes are "too high" after weak Eurozone economic data, and pricing remains aggressive. State Street Global Advisors also advises the ECB to "pause its actions," pointing out that the services PMI shows signs of demand destruction, and companies' ability to pass on high energy costs may be limited. Overall, geopolitical tensions driving up energy prices are forcing the ECB to act, and a June rate hike is almost a market consensus. However, the "stagflation" pattern of weak economy and high inflation presents the ECB with a difficult trade-off—while a rate hike could curb inflation expectations, it could also further suppress the already fragile economic recovery.
Key events to watch today: Speeches by ECB and Fed officials.
European Central Bank (ECB) official Olaf Sleipen will speak on Tuesday, and the market is focused on his policy stance. Sleipen, who took over as governor of the Dutch central bank and joined the ECB Governing Council in April, will be giving his first public speech, drawing significant attention. He recently warned that stablecoins pegged to the dollar could threaten European financial stability and explicitly stated that the ECB's upcoming policy discussions will revolve around "raising interest rates or keeping them unchanged"—a statement that itself suggests a June rate hike is not a certainty. If he adopts a hawkish stance, echoing officials like Kocher and Nagel, it will further solidify expectations of a June rate hike (currently priced in by the market at nearly 85%); a more cautious approach could dampen overly high expectations of a rate hike.
Minneapolis Federal Reserve President Neel Kashkari will also speak on the same day. As a relatively dovish official within the Fed, he has previously stated that uncertainty surrounding trade and immigration policies introduces uncertainty into the Fed's interest rate adjustments, favoring a postponement of policy changes until after September. Kashkari's comments on the inflation outlook are crucial ahead of the release of the US April PCE data (expected to be 3.8% year-on-year). If he acknowledges widening inflationary pressures or remains open to rate hikes, it will be seen as a hawkish signal, potentially strengthening the dollar; if he insists on a "temporary inflation" stance or emphasizes uncertainty, it may ease market expectations for aggressive rate hikes by the Fed.
The speeches by the two officials will create a contrast between "Euro hawkish, US dovish" and "Euro dovish, US hawkish," potentially exacerbating the policy divergence between Europe and the US. Current market pricing indicates an nearly 85% probability of a June rate hike by the European Central Bank, while the probability of the Federal Reserve maintaining its current rate is as high as 97.3%. If Sleppen leans hawkish and Kashkari leans dovish, the euro may receive support; conversely, the euro may face further downward pressure against the US dollar. The market will closely monitor the short-term impact of their statements on exchange rates and rate hike expectations.
Geopolitical risks and divergent central bank policies are putting short-term pressure on the euro.
In summary, the euro is currently pressured by uncertainty surrounding the US-Iran situation. The US military strikes in southern Iran have reignited geopolitical risks, boosting demand for the dollar as a safe haven. However, strong expectations of a June rate hike by the European Central Bank (with a probability of nearly 85%) may provide some support for the euro. In the short term, the euro's movement against the dollar will depend on substantial progress in US-Iran negotiations, the evolution of the Middle East situation, and further clarification of policy signals from central banks in Europe and the US.
EUR/USD Daily Technical Analysis
From the daily chart, the euro is currently trading around 1.1635 against the US dollar, in a consolidation phase after rebounding from recent lows, with multiple technical indicators showing neutral to weak signals.
(Euro/USD daily chart, source: FX678)
Regarding the moving average system, the short-term moving averages MA20 (1.1683) and MA50 (1.1658) are above the current price, forming short-term resistance; MA100 (1.1697) and MA200 (1.1680) are also above the current price. This arrangement of "price below all major moving averages" indicates that the euro/dollar exchange rate is under significant short-term pressure and is in a weak consolidation pattern.
At 09:14 Beijing time, the euro was trading at 1.1639/40 against the US dollar.
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