EUR/USD traded lower near 1.1715 in early Asian trading on Wednesday, with the US Dollar supported by uncertainty over a possible Middle East ceasefire. Markets are focused on the US Federal Reserve rate decision later on Wednesday.
Donald Trump said Iran asked the US to lift a naval blockade of the Strait of Hormuz while talks continue to end a two-month war. CNN reported that mediators in Pakistan expect Iran to submit a revised proposal within the next few days.
Geopolitical Risk And Dollar Demand
Iran has said it will not open the waterway while the US blockade remains in place. This keeps uncertainty elevated and supports demand for the US Dollar.
The Fed is expected to keep rates unchanged at 3.50% to 3.75% at its April meeting, which would be the third straight hold. Traders will watch Jerome Powell’s press conference for signals on the path ahead.
Attention then turns to the ECB decision on Thursday, with expectations of a hawkish hold and possible rate rises in June or July. Goldman Sachs forecasts two 25 bps hikes, in June and September, taking the deposit rate back to 2.50%.
In 2022, the Euro accounted for 31% of FX trades, with daily turnover above $2.2 trillion. EUR/USD represents about 30% of FX turnover; EUR/JPY 4%, EUR/GBP 3%, and EUR/AUD 2%.
Central Banks And Volatility
We see echoes of the situation back in 2025, where geopolitical risk drove flows into the US Dollar, putting pressure on the Euro. With EUR/USD currently struggling around 1.05 amid renewed tensions in the Middle East, the dollar’s safe-haven appeal is once again a dominant market theme. This week’s central bank decisions will be critical for setting a direction for the coming weeks.
The market is pricing in a hold from the Federal Reserve, keeping the federal funds rate in its current 4.00% to 4.25% range. Recent inflation data, with the core Consumer Price Index (CPI) remaining stubbornly above 3% last quarter, has pushed back expectations of any near-term rate cuts. This policy stance supports a strong dollar, especially as the US economy continues to show resilience with Q1 2026 GDP growth reported at a healthy 2.1%.
Across the Atlantic, the European Central Bank is also expected to hold its deposit rate at 3.00%, but its challenge is different. While Eurozone inflation has cooled, sluggish economic performance, particularly with Germany’s manufacturing PMI contracting for a fourth straight month, makes a hawkish policy difficult to justify. This economic divergence makes a sustained rally in the Euro unlikely.
For derivative traders, this suggests owning volatility could be a prudent strategy. We believe long straddles or strangles on EUR/USD options could be effective, as they would profit from a significant price swing following the central bank announcements, regardless of the direction. Implied volatility for one-month options has already risen to 8.2%, reflecting the market’s uncertainty, but a surprise could easily push actual volatility higher.
For those with a directional view, the path of least resistance appears to be a weaker Euro. The interest rate differential, with US 2-year yields offering a premium of over 120 basis points compared to German bunds, creates a positive carry for holding short EUR/USD positions. However, any unexpected de-escalation of global tensions could trigger a sharp relief rally, making disciplined risk management essential for any short futures or forward positions.
