Euro zone government bond yields climbed to their highest levels in nearly a month after U.S. President Donald Trump declared that the interim agreement with Iran is over. Speaking before a NATO summit in Turkey, Trump addressed questions about the status of the agreement to end hostilities with Iran, stating, "As far as I am concerned, the Iran ceasefire is over." This announcement followed aggressive actions by Iran's Revolutionary Guards targeting U.S. sites, with Iran's Revolutionary Guards saying they targeted U.S. military sites in Bahrain and Kuwait on Wednesday after the U.S. launched strikes on Iran in response to attacks on tankers in the Strait of Hormuz. The move contributed to the geopolitical escalation that has been driving market volatility in recent weeks.
ECB policymaker Yannis Stournaras confirmed that fresh US-Iran hostilities have pushed the European Central Bank back to its inflation fight, as rising energy prices threaten to reignite price pressures across the euro zone. According to Reuters, Stournaras, who also serves as governor of the Bank of Greece, said the resumption of hostilities highlighted how fragile and volatile the geopolitical situation remains and how difficult it has become to make reliable inflation forecasts in such an environment. Market expectations have shifted, with traders betting on two additional ECB rate increases over the coming year as policymakers seek to contain the inflationary impact of higher fuel costs stemming from the Iran conflict. The ECB raised interest rates at its June 10-11 policy meeting, with financial markets now pricing in the additional rate hikes as the central bank balances inflation containment against potential economic impact of higher borrowing costs.
The euro held near $1.14, close to its weakest level in a year, as rising oil prices fueled inflation concerns and increased bets on European Central Bank rate hikes. Brent crude reached two-week highs after renewed US-Iran strikes, with the latest surge contributing to the currency's decline. The euro's weakness reflects broader concerns about the Eurozone's economic outlook, with traders now pricing in over 30 basis points of additional ECB tightening this year, signaling at least one potential rate hike, possibly as early as September. The currency's decline comes as geopolitical tensions continue to weigh on European markets and fuel expectations for monetary policy tightening.
Euro zone government bond yields climbed to their highest levels in nearly a month as hopes of an imminent U.S.-Iran deal faded, with borrowing costs tracking sharp moves in oil prices that rose more than 7%. Germany's benchmark 10-year government bond yield increased 8.5 basis points to 3.072%, marking its highest level since June 11. The move followed escalating geopolitical tensions after the U.S. and Iran exchanged military strikes, with Iran's Revolutionary Guards saying they targeted U.S. military sites in response to Washington's weekend attacks. According to Investing.com, Germany's 2-year yields, which are sensitive to expectations for policy rates, rose 9 basis points to 2.682%, also reaching their highest since June 11. The U.S. also revoked a licence that had allowed Iran to export oil, contributing to the geopolitical escalation.
Politically, Germany's cabinet approved a 2027 budget draft, planning €555.4 billion in spending and raising borrowing to €203.6 billion, up from earlier estimates. In France, far-right leader Marine Le Pen confirmed her 2027 presidential bid, with polls favoring her National Rally, while uncertainty remains over President Macron's successor. These political developments add another layer of uncertainty to the Eurozone's economic outlook, contributing to the euro's weakness and the broader market volatility driven by geopolitical tensions.
