Euro strengthens against dollar on Iran dialogue progress

The euro saw gains, trading near $1.1650 against the dollar on Friday, buoyed by reports of advancements in negotiations aimed at ending the conflict in Iran. This positive sentiment surrounding potential peace talks supported a move towards riskier assets in the financial markets.

News emerged that U.S. negotiators had reached a tentative agreement with Iran, although it awaited final approval from President Donald Trump. Tehran, however, denied reaching any deal. Despite the conflicting reports, the prospect of a peace agreement appeared to influence currency markets.

Economic indicators released on Friday presented a mixed picture across Europe. In Germany, inflation decreased to 2.7% year-on-year in May, down from 2.9% in April, partly due to government tax cuts on fuel. France's economy experienced a slight contraction of 0.1% in the first quarter compared to the previous one, while its May inflation rate rose to 2.8%. Both Spain and Italy also saw increases in their year-on-year inflation rates for May, reaching 3.6% and 3.3% respectively.

Financial markets have largely priced in expectations that the European Central Bank (ECB) will raise interest rates twice this year, with the first hike anticipated in June. This outlook stems from inflation figures that are moving away from the ECB's medium-term target of 2%. The potential rate hikes signal an increase in the cost of money for the first time since 2023.