EUR/USD rose on Wednesday amid reports of progress towards a possible US-Iran deal, which weighed on the US Dollar and supported the Euro. The pair traded near 1.1750, up almost 0.50%, after reaching 1.1796, its highest level since 17 April.
Axios reported that Washington and Tehran are moving closer to an agreement to end the war and set a framework for detailed nuclear talks. The report said Iran could pause nuclear enrichment, while the US would lift sanctions and release billions of Dollars in frozen Iranian funds, with both sides expected to end the blockade around the Strait of Hormuz.
Market Reaction And Positioning
After the report, Oil prices fell and US Treasury yields moved lower, easing concerns about energy-led inflation and reducing pressure on the Federal Reserve to tighten policy. Traders shifted back towards pricing in possible Fed rate cuts by year-end.
The rally in EUR/USD was limited by uncertainty, after Donald Trump warned military action could resume if Iran does not accept the deal. Iran’s ISNA said parts of the report were “speculation” and described US demands as “ambitious and unrealistic”.
The US Dollar later stabilised, with the DXY at about 97.98 after an intraday low of 97.62. ADP data showed private payrolls rose 109K in April versus 61K in March, above the 99K forecast.
St. Louis Fed President Alberto Musalem said inflation is “meaningfully above target” and that “underlying inflation” needs attention. Focus now turns to US Jobless Claims on Thursday and Nonfarm Payrolls on Friday.
Lessons From Prior Geopolitical Spikes
We saw a similar situation back in 2025 when EUR/USD spiked on news of a potential US-Iran deal, only to have the rally fade. That event showed us how geopolitical headlines can cause sharp but short-lived moves if underlying economic realities don’t support them. This pattern is a key lesson for navigating the market today.
Given the current tensions in the South China Sea, any news of de-escalation could trigger a similar risk-on rally and a temporary dip in the US Dollar. However, we must remember that such sentiment shifts can reverse quickly. Therefore, we should view any sudden strength in EUR/USD as an opportunity to position for a return to the prevailing trend.
The fundamental backdrop today is quite different from that moment in 2025. WTI crude oil is holding steady above $85 a barrel, and the latest US Consumer Price Index (CPI) reading came in at a stubborn 3.1%, keeping inflation concerns front and center for the Federal Reserve. This contrasts with the oil price plunge last year that fueled hopes for Fed rate cuts.
For derivative traders, this means selling volatility on EUR/USD rallies could be a prudent strategy. Selling out-of-the-money call options or implementing bear call spreads above the 1.0950 resistance level allows us to collect premium from fading optimism. The VIX is currently hovering around 14.5, which is relatively low but can spike on news, providing better entry points for selling volatility.
Furthermore, the policy divergence between the central banks is more pronounced now than it was then. The Federal Reserve is signaling it will hold rates steady through the summer, while the European Central Bank is preparing for a potential rate cut in July as Eurozone inflation has fallen to 2.2%. This fundamental pressure should continue to weigh on the euro.
We should keep a close watch on this Friday’s US Nonfarm Payrolls report, as the labor market remains a critical factor for the Fed’s policy decisions. A strong jobs number would reinforce the higher-for-longer interest rate narrative and likely cap any sentiment-driven gains in EUR/USD. This confirms that economic data will ultimately overpower fleeting geopolitical headlines.
