EUR/USD traded firmer near 1.1540 in early Asian hours on Thursday as expectations built that the European Central Bank will raise rates at its June policy meeting later in the day. The anticipated move would mark the ECB’s first rate increase in three years, with attention on whether policymakers lean against potential second-round inflation effects linked to elevated energy prices.
Markets are also focused on the ECB’s updated inflation and growth forecasts, while pricing in three rate rises for the rest of the year. Christine Lagarde’s press conference is set to be parsed for guidance on whether Thursday’s step is a one-off adjustment or the start of further tightening in 2026. Separately, geopolitical developments could support the US Dollar: US Central Command said the US began launching strikes in Iran on Wednesday in response to what it described as Iran’s continued aggression, and the Islamic Revolutionary Guard Corps said the Strait is closed to all vessels, including oil tankers and commercial ships, effective immediately, warning that any vessel attempting transit will be targeted.
Monetary Policy Versus Geopolitical Risks
We see two powerful and opposing forces hitting the market at once. The expected ECB rate hike today is a clear positive for the Euro. However, the escalating conflict in the Middle East provides a strong tailwind for the safe-haven US Dollar.
This clash between monetary policy and geopolitics suggests a sharp increase in currency volatility is imminent. Consequently, we are positioning for a spike in price swings rather than a clear directional move in EUR/USD for now. The CBOE Volatility Index (VIX) has already jumped to 26, reflecting this heightened market anxiety.
Trading Strategies for a Volatile Environment
All eyes are on the ECB press conference later today for guidance on future tightening. Recent data showed Eurozone inflation holding stubbornly at 3.1%, making the case for more than one rate hike this year. We will be using short-dated options to trade any surprise hawkishness or dovishness from President Lagarde.
The closure of the Strait of Hormuz is a significant event that cannot be ignored. Brent crude has already surged past $105 a barrel in overnight trading, a more severe reaction than the 4% spike seen during similar tensions in 2019. We believe buying call options on crude oil and energy stocks offers a direct way to trade this supply shock.
In the coming weeks, we anticipate capital will flow into the US Dollar as a primary safe haven if the conflict escalates. Therefore, holding some exposure through long USD positions against riskier currencies is a prudent hedge. For those with existing long Euro positions, buying EUR/USD put options could be a cost-effective way to protect against a sharp downturn.
