EUR/USD rose towards 1.1720 in Asian trading on Wednesday, supported by improved risk mood. Markets awaited the US ADP Employment Change report later on Wednesday.
On Tuesday, The Guardian reported that US President Donald Trump said Project Freedom and ship movements through the Strait of Hormuz had been paused. Trump said the US blockade “will remain in full force and effect”, and added the pause was to allow time for a possible US-Iran agreement to be finalised and signed.
Geopolitical Risk And Market Sentiment
US Defence Secretary Pete Hegseth said on Tuesday that the US-Iran ceasefire was in place despite attacks in the Strait of Hormuz. Traders continued to watch for updates on the ceasefire and broader Middle East tensions.
In Europe, the European Commission said on Tuesday that the EU trade chief urged the US to quickly restore tariffs set out in last year’s EU-US trade deal. The Commission said it would help if the main terms were in place before the deal’s one-year anniversary at the end of July.
Reuters reported that Maros Sefcovic met US Trade Representative Jamieson Greer in Paris on Tuesday. EU concerns include Trump’s threat to raise tariffs on EU cars and trucks to 25%.
We recall how shifts in geopolitical risk, such as the pause in Project Freedom we saw back in 2025, directly fueled risk-on sentiment and lifted the EUR/USD. That past event serves as a useful template for the current environment. Any sign of de-escalation tends to weaken the dollar’s safe-haven appeal.
Right now, we are seeing a similar dynamic with the recent pullback of naval vessels in the Taiwan Strait, which has calmed market fears significantly. The CBOE Volatility Index (VIX) has reflected this, dropping nearly 10% over the past two weeks to trade just above 14. This suggests traders should consider strategies that benefit from lower volatility and a potential grind higher in riskier currencies against the dollar.
Options Positioning For A Lower Volatility Regime
For option traders, this environment favors selling premium. We could look at selling out-of-the-money puts on the EUR/USD pair to collect income while positioning for a modest move higher. Alternatively, a bullish call spread would define our risk while targeting a specific upside level.
However, we must also weigh the ongoing trade friction between the US and the South American trade bloc, Mercosur, over electric vehicle subsidies. This situation mirrors the tariff uncertainty we faced with the EU in the past. These unresolved trade issues are likely to cap any significant euro strength in the near term.
This undercurrent of trade tension means holding some downside protection is prudent. A simple hedge would be to buy some cheap, further out-of-the-money EUR/USD puts. This can protect our portfolio from a sudden reversal should the trade talks sour unexpectedly.
Looming over everything is this Friday’s US Non-Farm Payrolls report, which could easily override geopolitical sentiment. After April’s robust report showed job growth of 265,000, another strong number would bolster the case for the Federal Reserve to hold rates higher for longer. The consensus forecast currently sits around 210,000, so any major deviation will cause volatility.
Therefore, any bullish positions on the euro should be structured with this key data risk in mind. Using defined-risk option spreads is much safer than holding leveraged futures positions through the data release. This allows us to participate in the upside from easing tensions while limiting potential losses from a strong US jobs report.
