The dollar has gained from safe-haven demand as the war in the Middle East affects market mood, pushing EUR/USD below 1.15 and keeping it trading around that level. Foreign exchange volatility has risen, and mixed reports from both sides have made events harder to judge. Alongside volatility, interest rate differentials and real interest rates may matter more for exchange rates in the coming weeks if the conflict continues and energy prices stay high. Central banks are not expected to change policy rates soon, instead pointing to risks to inflation and growth.

Real Interest Rates And Exchange Rate Drivers

If the war is short, central banks may expect energy prices to stabilise and treat the price shock as temporary, which could shift rate expectations that have already moved quickly. Markets are likely to watch interest rate expectations and real rate trends closely. A fall in real interest rates, caused by higher inflation while policy rates stay steady or fall, is generally negative for a currency. The article was produced using an AI tool and reviewed by an editor. As we look back, the conflict in the Middle East during late 2025 clearly drove a safe-haven bid for the dollar, pushing EUR/USD below the 1.15 mark. During that period of uncertainty, markets reacted mainly to headlines, causing high volatility. Now, the focus is shifting away from that flight to safety and back towards economic fundamentals. The theme that could become more important in the coming weeks is the trend in real interest rates, just as we suspected might happen. Central banks held steady during the initial shock, but now their paths are starting to look different. This divergence is creating new opportunities beyond simple risk-on or risk-off sentiment.

Implications For Eurusd Positioning

For example, the latest U.S. CPI data for February 2026 came in at 2.8%, slightly above expectations. With the Federal Reserve holding its key interest rate at 4.75%, this is compressing the real yield available on the dollar. This makes holding dollars for its yield slightly less attractive than it was a few months ago. Meanwhile, inflation in the Eurozone has been stickier, with the February 2026 reading at 3.1%. The market is now pricing in a reduced probability of ECB rate cuts this year, whereas expectations for a Fed cut by the fourth quarter remain. This narrowing of the real interest rate differential between the U.S. and Europe is supportive for the euro. This environment suggests that long volatility strategies that worked during the 2025 conflict are less relevant now. Derivative traders should consider positioning for a potential rise in EUR/USD by looking at call options for the second quarter of 2026. This allows for participation in a gradual upward grind driven by shifting yield expectations rather than sudden news events. We saw a similar pattern after the initial shock of the Ukraine conflict in 2022, where the market’s focus quickly pivoted from the event itself to how central banks would respond to the inflationary consequences. The dollar’s initial strength gave way as other central banks began their own aggressive hiking cycles. It appears we are now entering that second phase following the events of last year. Create your live VT Markets account and start trading now.

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