EBC Markets Briefing | Euro meanders after fresh US attack; pound rebounded

The euro steadied on Tuesday on rising investor optimism of a deal being struck to reopen the Strait of Hormuz and end the Iran war. But fresh US attacks on Iranian targets kept investor on the edge.

Iran would proceed to clear mines from the ​strait during a 30-day window ​following an agreement, after which ships ‌from ⁠all countries would be able to navigate freely and safely, and Iran would stop collecting ​transit ​fees, Nikkei reported.

The ECB would be making "a big mistake" by hiking interest rates in a bid to combat inflation, according to Berenberg, who warns that such a move risks tipping the continent into recession.

The central bank kept interest rates steady last month. But in a statement, its governing council conceded that the upside risks to inflation and the downside risks to growth "have intensified."

The European Commission now forecasts growth will slow to 0.9% in 2026 from 1.3% in 2025, with a rise of 1.2% in 2027. In its last set of forecasts in November, the expectations were respectively 1.2% and 1.4%.

Weaker growth, higher interest rates, measures to ease the impact of energy shock and increased defence spending would worsen public finances. Italy is now the most indebted in the bloc.

The single currency displayed a short-term bullish recovery within a broader, multi-week bearish downtrend. The thing is the momentum seems waning, pointing to a drop to $1.1630.

Asset recap

As of market close on 25 May, among EBC major products, the Nikkei 225 Index led gains. It closed above the 65,000 level for a record high, driven by rising optimism for a de-escalation in US-Iran tensions.

Oil prices took a nosedive on hopes that the US and Iran are inching closer to a peace deal. However, an Iranian government spokesperson cautioned that an agreement was "not imminent".

Sterling climbed to its highest level since 13 May amid risk-on mood. Investors appeared relieved after softer inflation figures and weaker retail sales data reduced pressure on the BOE to tighten monetary policy further.

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