ECB Hike Looms as Euro Steady Amid AfD Victory and Ongoing US-Iran Tensions

The euro has remained relatively stable just above $1.16 as investors weigh in on the implications of the far-right Alternative for Germany (AfD) party's election victory in Saxony-Anhalt and the upcoming European Central Bank (ECB) policy meeting.

The AfD secured 44% of the vote, falling short of an overall majority but delivering a significant blow to Chancellor Friedrich Merz's conservatives. This development has added to the uncertainty surrounding Germany's domestic politics.

In the meantime, Brent crude oil prices have surged closer to seven-week highs following the US military strike on three Iranian oil tankers over the weekend, with one tanker destroyed. Tehran has responded by threatening to establish a new restricted zone outside the Strait of Hormuz.

The ECB is expected to raise interest rates this Thursday, taking a cautious approach due to the ongoing US-Iran conflict, which has kept oil prices elevated and revived inflationary pressures. Market participants are pricing in roughly a 90% probability of a second rate hike by the end of the year.