Euro dips below 1.1750 as US-Iran ceasefire extension fails to calm markets

The Euro softened against the US Dollar to near 1.1750 on Tuesday, as an indefinite extension of the US-Iran ceasefire failed to fully reassure markets, which remain focused on the risk of a broader energy crisis and divergent economic signals from the US and Europe. While the diplomatic move initially aimed to de-escalate tensions that have pushed Brent crude toward $100 a barrel, the US Dollar found support from strong domestic retail sales data, which surged 1.9% in March, reinforcing expectations that the Federal Reserve will not cut interest rates in 2026.

"The data in the U.S. is telling a consistent story of a decent acceleration," said Adam Button, chief currency analyst at investingLive. "That's been obscured by the war and it should be a U.S. dollar tailwind because I find it hard to believe that we will go back to pricing in two cuts this year.”

The dollar’s strength came as the euro struggled for its own footing. The European Central Bank is adopting a wait-and-see approach, hesitant to make any policy moves until the full economic impact of the Middle East conflict becomes clearer, according to a recent report from the bank. The war presents a classic supply shock, threatening to raise inflation while simultaneously hitting the Eurozone's already weak growth. The primary concern for the ECB is whether higher energy costs will trigger "second-round effects" that entrench inflation.

The situation is further complicated by the fragile state of the global energy supply chain. The head of the International Energy Agency, Fatih Birol, has called the situation "the worst energy crisis in history," with the effective closure of the Strait of Hormuz—a chokepoint for about 20% of global oil trade—fueling fears of prolonged supply disruptions. Iran has maintained that the strait will not reopen while the US naval blockade persists, creating a tense standoff that keeps a high floor under oil prices and weighs on global risk appetite.

US economic strength contrasts with European caution

While geopolitical tensions are the primary driver of market sentiment, the underlying economic data reveals a growing divergence between the United States and Europe. The 1.9% jump in US retail sales for March, which blew past the 1.4% estimate, points to a resilient American consumer, partly bolstered by unusually large tax refunds. This robust spending gives the Federal Reserve little reason to consider easing monetary policy, with Fed funds futures traders now pricing in only a 36% chance of a single 25-basis point rate cut this year.

In contrast, the European Central Bank remains in a holding pattern. Policymakers are caught between rising inflation risks from the energy shock and the threat of an economic slowdown. The central bank has indicated it will closely watch incoming data before making any decisions, leaving the euro vulnerable to shifts in risk sentiment and relative economic performance. This policy divergence with the more hawkish Federal Reserve is a key factor underpinning the dollar's strength against the euro.

UK data offers mixed signals

Across the channel, the United Kingdom presented a mixed economic picture that did little to support the Pound Sterling or provide a clear lead for the euro. The UK's unemployment rate unexpectedly fell to 4.9% for the three months ending in February, beating forecasts of 5.2%. However, analysts were quick to point out the underlying weakness in the report.

“The UK unemployment rate, which dropped from 5.2% to 4.9%, appears to be driven by a spike in 'economic inactivity' as opposed to a rise in employment," noted analysts at ING. Sanjay Raja, chief UK economist at Deutsche Bank, added that "underneath the hood, signs of weakness continue." The focus for the UK now shifts to the upcoming Consumer Price Index (CPI) data, which is expected to show inflation accelerating to 3.3% in March, further complicating the Bank of England's policy outlook.

This article is for informational purposes only and does not constitute investment advice.