The Euro gained traction above 1.1600, with the EUR/USD pair trading near 1.1635 during early European hours on Tuesday, supported by a hawkish stance from the European Central Bank (ECB) and anticipation of the preliminary Harmonized Index of Consumer Prices (HICP) inflation release for the Eurozone later in the day [1]. European stock futures also pointed to a positive open, with Stoxx 50 futures up 0.6%, FTSE 100 futures up 0.3%, CAC 40 up 0.1%, and DAX up 0.5% as investors awaited the flash inflation data [2].
ECB executive board member Isabel Schnabel signaled potential rate hikes, citing the inflationary impact of the Iran conflict and the risk of unanchored inflation expectations, as price pressures have spread beyond the energy sector [1]. Markets are currently pricing in a 94% chance of the ECB hiking its key interest rate by 25 basis points at its meeting later this month, according to LSEG data [2]. Headline inflation in the Eurozone is expected to tick up to 3.2% year-on-year in May from 3.0% in April, with April's inflation already up from 2.6% in March and well above the ECB's 2% target [1][2]. Europe remains vulnerable to energy shocks due to its status as a major net energy importer [2].
Geopolitical uncertainties continue to influence market sentiment. Iran’s state media reported that Tehran suspended talks over Israel’s actions in Lebanon, while U.S. President Donald Trump stated that he believes an agreement to reopen the Strait of Hormuz and extend the ceasefire with Iran is reachable "over the next week" [1]. However, according to CNBC, Trump told the network he "really doesn't care" if peace talks with Iran had collapsed, describing the negotiations as "very boring" [2]. European investors are also monitoring developments in the Russia-Ukraine war, with Moscow launching a major air assault on Ukrainian cities and the EU preparing its 21st package of sanctions against Russia [2].
The upcoming Eurozone HICP inflation report is expected to provide clues about the ECB's interest rate outlook, with any signs of hotter inflation likely to support the Euro in the near term [1]. Other economic data releases in Europe on Tuesday include balance of trade figures from Switzerland, Spanish unemployment, and British mortgage lending figures [2].
CONCLUSION
Both the Euro and European equities are showing signs of recovery ahead of the Eurozone's key inflation data release, with markets anticipating a potential ECB rate hike amid persistent inflation and geopolitical tensions. Investors remain cautious as energy prices and ongoing conflicts in the Middle East and Ukraine continue to impact sentiment and policy outlooks.