Commerzbank’s Volkmar Baur links a possible end to the Iran conflict and the reopening of the Strait of Hormuz with shifts in real interest rate expectations that could support the euro against the US dollar. He says eurozone inflation expectations and European Central Bank pricing respond more to oil moves than those in the United States.
Oil fell from about USD 110 per barrel to around USD 101, while the euro rose about 1% against the dollar and the trade-weighted USD fell 0.4%. EUR/USD is back near 1.175, after hovering around 1.18 before the conflict and briefly touching 1.14 at its low.
Oil Moves And Real Rate Shifts
He states that a drop in oil would likely pull eurozone rates down more than US rates, but would push eurozone inflation expectations down even more than in the US. This would tilt real-rate differentials in the euro’s favour under this scenario.
He also points to a divergence between EUR/USD and the 10-year yield spread over the past 10 weeks, starting after April 13. He notes a roughly 2-cent upward shift in EUR/USD over the weekend of April 11/12, which coincided with the Hungarian election.
The relationship between oil prices and the euro-dollar exchange rate remains critical for our strategy. A drop in oil prices tends to boost the euro more than the dollar because of how sensitive Eurozone inflation expectations are to energy costs. We saw this exact dynamic play out in the spring of 2025 following the temporary resolution of the Iran conflict.
With Brent crude currently hovering around $95 a barrel due to lingering tensions, any sign of diplomatic progress could trigger a sharp price drop. Considering the latest Eurozone HICP inflation print of 2.8% is still well above the US core PCE of 2.5%, a fall in oil would likely have a much larger disinflationary effect in Europe. This would improve the Eurozone’s real interest rate picture relative to the U.S.
Positioning For Euro Upside
Therefore, positioning for euro upside in the coming weeks seems prudent. Buying EUR/USD call options with a one-to-three-month expiry allows us to capture potential gains from a sudden de-escalation event. With one-month implied volatility for the pair currently sitting near a two-year low of 5.5%, the cost of establishing such positions is relatively attractive.
We must also remember the structural support for the euro that emerged from political developments, as seen after the Hungarian election results in April 2025. That event created a lasting positive shift for the currency, independent of oil prices. This underlying political confidence means any oil-driven rally could start from a higher base and have more staying power.
