Euro Slips Below $1.16 as Oil Near Four-Year Highs Forces ECB's Hand

The euro fell to its weakest level since early April on Wednesday, dropping 0.10% to $1.1594 against the dollar, as oil near four-year highs pushed eurozone inflation to 3%—well above the ECB's mandate—and left traders pricing an increasingly hawkish path for the central bank. The currency has shed 1.27% this month. The concern driving that selloff is straightforward: the ECB now looks likely to hike rates into an economy that barely grew in the first quarter, with GDP expanding just 0.1%—the weakest reading since Q2 2025. Markets have moved to price in better than 80% odds of a 25-basis-point increase next month, with two more hikes expected before year-end. Brent crude eased to $110.48 per barrel during European hours from Monday's close of $110.80, but the modest pullback did nothing to relieve the underlying pressure. U.S.-Iran talks over the Strait of Hormuz showed no progress, keeping supply disruption risk alive and energy input costs elevated across the eurozone. European equities offered no clear read on market conviction. The Stoxx 600 closed flat to slightly lower. London's FTSE 100 dropped 0.3% to 7,702, while Frankfurt's DAX eked out a marginal gain. The prior session had seen brief enthusiasm—the FTSE and CAC each rallied 0.7%-0.9% on reports of diplomatic movement in the Middle East—but that reversed as talks stalled. The sectoral split was the more telling signal. Mining stocks gained 2.4% on Tuesday as commodity prices held firm. Technology fell 0.6% and household goods dropped 0.5%, reflecting pressure on consumer purchasing power. Energy producers and extractors are being insulated; end-users of energy are not. With the Fed announcing its decision Wednesday and the Bank of England on Thursday—both expected to hold—attention is shifting to whether the Bank of Japan's move last week changes the calculus. Tokyo raised its short-term rate to 0.0%-0.1% from -0.1%, ending 17 years of negative rates, reinforcing the view that ultra-loose policy is unwinding globally. For euro traders, the near-term pivot point is Brent's ability to hold above $110. Any Hormuz deal—even a preliminary framework—could deflate both oil and ECB rate expectations simultaneously, offering the battered euro room to recover. Before that, Friday's eurozone PMI prints will test whether the 0.1% Q1 GDP figure masked a deeper slowdown in services. A weak reading would push out the timetable for ECB hikes and complicate an already difficult positioning call.