EUR/USD Exchange Rate Analysis: Euro Holds at $1.165 as ECB Rate Hike Bets and Middle East Tensions Drive May Volatility

The EUR/USD exchange rate is navigating a complex web of monetary policy signals and geopolitical risk as May draws to a close, with the pair holding near the $1.165 level amid competing forces from European inflation data, hawkish European Central Bank commentary, and the unresolved US-Iran conflict that has reshaped global energy markets since late February.

On the final trading session of May, the euro held steady at $1.165, leaving the pair on track for a 0.8% monthly loss against the US dollar. That monthly decline masks considerable intra-month turbulence. According to trading data, the EUR/USD rate rose to $1.1668 on May 29, up 0.14% from the previous session, following a brief dip to $1.161 — a six-week low — earlier in the week. Over a 12-month horizon, the pair remains up 2.82%, reflecting the broader dollar softness that has characterised the post-pandemic macroeconomic cycle. The 2026 year-to-date average stands at approximately $1.17, though the euro struck its highest point for the year at $1.2019 on January 27 before retreating sharply to a low of $1.1453 on March 18 as the Iran conflict intensified.

The dominant near-term driver for EUR/USD remains the ECB's June 11 policy decision. Rate markets are now fully pricing in a 25-basis-point hike at that meeting, with two hikes expected by September and a 92% probability of a third before year-end. That hawkish repricing has accelerated following the release of ECB meeting minutes, which revealed a notably divided Governing Council: a number of members indicated the April decision to hold rates was a close call and that they would not have opposed raising rates had it been on the table. The ECB held its deposit facility rate at 2.00% at the April 30 meeting, with President Christine Lagarde acknowledging that the bank is "certainly moving away" from its baseline scenario as energy-driven inflation persists.

Fresh May inflation readings from the eurozone's largest economies have reinforced that hawkish tilt. Flash EU-harmonised data showed inflation accelerated in France, Italy, and Spain during May — France's HICP rate climbed to 2.8% year-on-year, its highest level in more than a year, driven primarily by natural gas prices. Germany bucked the trend with a modest slowdown, though all four major economies remained well above the ECB's 2% target. A Bloomberg survey of economists published earlier this month concluded that the ECB will raise interest rates twice in 2026, with quarter-point hikes in both June and September, aligning market pricing with consensus forecasts for the first time this cycle.

The broader macro backdrop is complicated by the ongoing US-Iran conflict, which began on February 28 with joint US-Israeli airstrikes on Iranian military infrastructure. The conflict triggered the largest global oil supply disruption on record as Iran closed the Strait of Hormuz — through which approximately 20% of the world's daily oil supply transits — driving Brent crude from roughly $73.50 before the war to a peak near $120 in early March. The euro bore the brunt of the energy shock among G10 currencies: as a major energy importer, Europe is disproportionately exposed to oil price spikes, and the euro suffered accordingly during periods of peak geopolitical stress. The dollar, by contrast, benefited from safe-haven flows throughout the escalation phase before softening on ceasefire news.

Recent days have seen diplomatic developments inject fresh two-way volatility into EUR/USD. According to Axios, US and Iranian negotiators reportedly agreed on a 60-day memorandum of understanding to extend the ceasefire and open talks on Iran's nuclear programme, though final approval from President Trump remains pending. However, White House sources also confirmed that the US and Iran struck a 60-day ceasefire extension to allow formal talks. Fresh US airstrikes reported late in the week briefly pushed the euro lower, and the dollar index edged up 0.135% to 99.15 on Tuesday as investor confidence in a swift resolution faded. The US PCE price index rose 3.8% year-on-year in April — its highest since May 2023 — while US Q1 GDP growth was revised down to an annualised rate of 1.6%, reinforcing a stagflationary backdrop that complicates Federal Reserve policy and limits the dollar's upside from yield differentials alone.

The Federal Reserve held rates in a range of 3.50%–3.75% at its April meeting, with US inflation too elevated for an aggressive easing cycle. That policy divergence — the ECB poised to hike while the Fed holds — is creating a structural cross-current for the pair. Platforms such as eToro, which operates under FCA, CySEC and ASIC regulation and offers retail access to forex markets, report elevated client activity in EUR/USD as the dual catalyst of ECB rate expectations and Middle East headlines continues to generate short-term trading opportunities.

From a technical standpoint, analysts note that EUR/USD faces its first meaningful resistance at the $1.1800 zone, with the larger test concentrated between $1.1974 and $1.2000. A daily close above the $1.20 level would likely trigger trend-following demand and open the path toward $1.22. On the downside, $1.1680 remains the immediate technical pivot: holding above it keeps the medium-term bullish structure intact, while a break below that level would expose $1.1550 and reopen the March low near $1.1476.

**Outlook**

The euro's trajectory heading into June hinges on two binary events: the ECB's June 11 rate decision and the evolution of US-Iran diplomatic talks. The base case among major bank analysts — including J.P. Morgan, which forecasts EUR/USD around $1.20 for the year, and Goldman Sachs, which targets $1.25 by year-end — assumes the ECB delivers at least one hike while the Fed remains on hold, narrowing the transatlantic rate differential in the euro's favour. The euro is forecast to trade in a $1.15–$1.20 range against the dollar over the next six months, with the ECB's June meeting the dominant near-term catalyst.

A confirmed ECB hike paired with credible progress in US-Iran peace talks — reducing energy prices and lifting eurozone growth expectations — could catalyse a move toward the top of that range. Conversely, a breakdown in diplomacy that pushes Brent crude above $100 again, combined with any sign that the ECB blinks on its tightening path due to growth concerns, would likely push EUR/USD back toward the $1.15 support floor. For now, the pair's near-$1.165 perch reflects a market in watchful equilibrium — aware of the upside potential but unwilling to commit until the twin pillars of monetary policy and geopolitical stability provide clearer confirmation.