The euro remained relatively stable in Monday trading as fresh economic data from the eurozone showed improving industrial activity, while rising inflation pressures strengthened expectations that the European Central Bank (ECB) may raise interest rates as early as June.
New Purchasing Managers’ Index (PMI) data showed that eurozone manufacturing activity expanded in April at its fastest pace in four years, driven largely by companies accelerating purchases of raw materials ahead of expected price increases and possible supply disruptions.
The stronger factory performance broadly matched market expectations, helping support the euro despite continued economic uncertainty.
Analysts say much of the increase in activity reflects front-loaded buying behavior rather than a broad-based recovery in demand.
Companies across Europe have been stockpiling inputs as concerns grow over rising energy prices and supply chain disruptions linked to geopolitical tensions in the Middle East.
That strategy has boosted short-term industrial activity, but it is also pushing costs higher.
Input costs rose sharply in April, with manufacturers reporting the fastest increase in production prices since early 2023, according to the PMI survey.
At the same time, supply chains are showing signs of stress again, with delivery times lengthening due to higher demand for raw materials and logistical bottlenecks.
The inflationary pressure is adding new complexity to the ECB’s policy outlook.
Eurozone inflation rose to 3 percent in April, moving further above the ECB’s official 2 percent target, with energy prices accounting for much of the increase.
That has pushed markets to increasingly price in an interest rate increase at the ECB’s next policy meeting in June.
ECB policymakers have already signaled that a June rate hike is becoming increasingly likely if inflation remains elevated.
Higher interest rates would typically support the euro by increasing returns on euro-denominated assets and pushing government bond yields higher across the region.
That could provide medium-term support for the European currency.
But risks remain.
The same geopolitical tensions driving energy prices higher are also threatening economic growth.
Prolonged instability in the Middle East, particularly around oil supply routes, could weaken consumer spending, reduce business investment and slow the broader eurozone economy.
Trade tensions with the United States also remain a concern, adding another layer of uncertainty for exporters and manufacturers.
Markets are now closely watching speeches and comments from ECB officials in the coming days for clearer signals about the June decision.
Any shift in tone — either more aggressive or more cautious — could trigger volatility in both the euro and European bond markets.
For now, the euro remains caught between two competing forces: stronger industrial momentum on one side, and rising inflation and geopolitical risk on the other.