• EUR/USD extends losses as US-Iran tensions keep the Dollar broadly supported.
• Markets now expect the Federal Reserve to hold rates through 2026 amid persistent inflation risks.
• The European Central Bank faces pressure as higher energy costs threaten Eurozone growth.

The Euro (EUR) edges lower against the US Dollar (USD) on Thursday, with EUR/USD extending losses for a third consecutive day as ongoing geopolitical tensions surrounding the US-Israel war with Iran keep the Greenback firmly bid across the board. At the time of writing, the pair trades near 1.1529, down around 0.26% on the day.

The war is expected to drag on after Iran rejected a proposed 15-point plan from the United States aimed at ending the conflict, saying any agreement must be on its own terms, including security guarantees and recognition of its authority over the Strait of Hormuz.

The Strait of Hormuz remains effectively closed, with the conflict continuing to embed a geopolitical risk premium in Oil prices. This is fueling global inflation concerns and could prompt major central banks to keep interest rates higher for longer or even consider raising rates if Oil prices remain elevated.

Markets now expect the Federal Reserve (Fed) to keep interest rates on hold through 2026, with the central bank already navigating a difficult policy backdrop. Inflation remains above the 2% target, with renewed upside risks, while labor market risks are tilted to the downside, putting both sides of the Fed’s dual mandate under pressure.

In this environment, the Fed is likely to remain data-dependent, keeping policy restrictive for longer to contain inflation while closely monitoring signs of weakness in the labor market before considering any adjustments.

The European Central Bank (ECB) is also in a difficult position. While inflation is relatively contained near the 2% target, the Eurozone’s reliance on energy imports makes it more exposed to higher Oil prices, which are expected to weigh on growth and household spending.

Market pricing has shifted sharply, with two rate hikes now fully priced in versus earlier expectations of a hold, and April increasingly seen as the likely timing for the first rate hike.

Supporting this view, ECB policymaker Joachim Nagel said, “An April rate hike is certainly an option, but just one option,” adding, “We will have enough data by April to determine if we need to act or if we can wait and see.”

On the data front, recent economic releases this week have pointed to a slowdown in the Eurozone economy. Germany’s GfK Consumer Confidence for April fell to -28, missing expectations, while the Ifo Business Climate index dropped to a 13-month low of 86.4 in March.

Recent Purchasing Managers Index (PMI) data also showed business activity losing momentum, reinforcing concerns about weaker growth.