The euro’ fell nearly 1.65% in Q1, only to claw back about 1.25% in April. At one level, that looks like noise within a broader range. At another, it reflects a market that has been repeatedly and abruptly forced to reprice the policy outlook in response to shifting geopolitical and macroeconomic crosscurrents.The ECB meets tomorrow, and a hawkish hold remains the most likely scenario. There is roughly a 10% chance of a hike priced in for this meeting. June is fully discounted for a quarter-point move. That asymmetry alone tells you something important: the bar to action tomorrow is high, but the bar to signaling is not.The evolution of rate expectations over the past several weeks has been nothing short of dramatic. Before the escalation of the Middle East conflict, the market was still leaning toward another cut this year—about a 55% probability. Then came a sharp, violent reversal. At the peak of the repricing on April 7, three hikes were fully discounted and the market was flirting with a fourth. This seemed exaggerated but even now the swaps market has three hikes fully priced. Energy prices have been the most direct transmission channel. July Brent pushed to a new contract high, $108-$109 today. Even when hostilities end, the supply risk premium is unlikely to vanish quickly. This matters for Europe more than most. The region remains acutely sensitive to imported energy costs, and the second-round effects—while not yet evident in the data—are a key risk the ECB cannot dismiss.The ECB’s own survey data bear this out. Inflation expectations are rising. That explains why the market has been willing to pivot so aggressively from pricing cuts to pricing hikes. It also explains why the ECB is unlikely to push back too forcefully against current market pricing. A central bank that spent the better part of two years trying to anchor expectations is not eager to see them drift again.The incoming data ahead of tomorrow’s decision is notable. Q1 GDP is expected around 0.2%, matching Q4’s pace—not recessionary, but hardly reassuring. April’s preliminary CPI is expected to rise to around 3.0% from 2.6%, with a monthly gain close to 1.0% following March’s 1.3%. Much of the impulse traces to energy and food; core appears broadly stable. In other words, the inflation story is visible but has not yet broadened enough to force an immediate response.The labor market remains a source of quiet support for the hawks. The unemployment rate is expected near 6.2%, effectively matching the lowest levels of the EMU era. That gives the ECB room to maintain a tightening bias even as growth stays subdued.From a market perspective, the euro’s trajectory remains tethered to rate differentials. The US two-year premium over Germany—a relationship that tracks the exchange rate closely—narrowed sharply this year, from just above 150 basis points in mid-January to just over 100 earlier this month, the tightest in three years. It widened back toward 130, but has since compressed again to around 118. For context, it sat near 200 basis points a year ago. That compression has been one of the euro’s most reliable supports. That said, the end of the Middle East war would likely see a risk-on move by investors that would buoy the euro. The technical picture, however, has turned more cautious. The euro peaked near $1.1850 on April 17 and has since reversed lower. The initial target in the $1.1675–$1.1700 area was met, but selling pressure did not look exhausted. Momentum indicators point to scope for additional losses. The next area of interest is around $1.1650. Volatility, meanwhile, has been retreating. Three-month implied euro vol slipped to a three-month low earlier this week, just below 5.8%, against a 50-day moving average near 6.7% and a 100-day around 6.3%. The compression suggests the market is less concerned about large directional moves and more comfortable expressing views through carry and relative rates. Still, we suspect that implied vol is poised to move higher. Finally, the consensus has quietly turned a shade less bullish. Bloomberg’s latest survey puts the euro at $1.1750 at end-June and $1.19 by end-September and year-end—both a touch lower than a month ago. That shift may appear marginal, but it reflects a wider recognition that the path higher is unlikely to be linear.The near-term hinges heavily on how the ECB handles tomorrow. A hawkish hold would validate much of the recent repricing without committing to immediate action. That may be enough—for now. But with energy prices elevated, inflation expectations on the move, and geopolitical risks unresolved, the balance of risks stays fluid. The euro’s recovery is real. It is not yet secure.