EUR/USD previously rose faster than rate differences suggested, linked to expectations of a weaker US dollar under President Trump. More recently, it has trailed rate differentials as the US economy is expected to grow faster than the eurozone and is seen as a safe haven.
A rally towards 1.18 has reversed the entire decline since the start of the US and Israeli war with Iran. The US is described as less exposed to an oil price shock than the eurozone.
Shift In Eurusd Drivers
Further gains are linked to possible de-escalation in the Gulf, including reopening the Strait of Hormuz, and lower oil prices. Expected ECB rate rises are also cited as support, with a move back above 1.20 presented as possible.
We have noticed that EUR/USD is not rallying as much as interest rate differences would suggest it should. During 2025, the pair rose significantly based on the belief that the new administration wanted a weaker dollar. Now, the dollar is being supported by a stronger U.S. economy and its status as a safe place to invest during conflict.
The economic data clearly shows this gap, with forecasts for first-quarter U.S. growth tracking near 2.8%, far outpacing the Eurozone’s expected 0.9%. This stronger performance in the U.S., combined with its lesser vulnerability to the recent oil price spike, has capped the Euro’s potential. The recent rally to 1.18 has only just erased the losses seen since the conflict in the Gulf began.
However, the situation seems to be shifting this week. We are seeing early signs of de-escalation in the Gulf, and some insurers are reportedly lowering risk premiums for ships passing through the Strait of Hormuz. This has helped Brent crude oil prices fall by 8% over the last week, providing significant relief to the more energy-dependent Eurozone economy.
Options Strategy Considerations
With March inflation in the Eurozone still above 3%, markets are now pricing in a 75% chance of an ECB rate hike by June, while the Federal Reserve is expected to remain on hold. For derivative traders, this growing policy difference suggests that buying EUR/USD call options with strike prices around 1.20 could prove timely. This strategy allows for profiting from a potential sharp upward move if tensions continue to ease.
Traders should consider options with expirations in the next one to three months to capture this potential shift in sentiment. Implied volatility has been elevated due to the conflict, but as it subsides, these options could become cheaper. This creates an opportunity to position for a rally back above 1.20 with a clearly defined risk.
