EUR/USD traded firmer near 1.1590 in early Asian dealing on Tuesday, as a deal to reopen the Strait of Hormuz lifted risk appetite and supported the Euro against the US Dollar. The agreement was described as ending a US blockade of Iranian ports, reopening the waterway and launching 60 days of nuclear negotiations, while markets also looked ahead to the Federal Reserve’s interest-rate decision due on Wednesday.
Uncertainty persisted because the parties gave different accounts of key terms, including Iran’s intention to levy “fees” versus statements that the Strait would fully reopen on Friday without tolls. The Fed is widely expected to leave its benchmark rate unchanged at 3.50% to 3.75%, and attention will turn to the press conference for guidance on policy direction under new chair Kevin Warsh. Hawkish messaging could curb further losses in the Greenback and weigh on the pair.
Short-Term Sentiment and Event Risk
We believe the deal to reopen the Strait of Hormuz is creating short-term positive sentiment, but the conflicting details from both sides suggest this is a fragile situation. The 60-day negotiation window introduces significant event risk, making the current rally in EUR/USD vulnerable to a sharp reversal. We are therefore positioning for a spike in volatility rather than a sustained directional move.
The Federal Reserve meeting this Wednesday is the most immediate risk factor for the pair’s upward momentum. While we expect rates to remain at 3.75%, any hawkish commentary from new Fed Chair Kevin Warsh could quickly strengthen the dollar. We remember how the aggressive tightening cycle of 2022-2023 drove significant dollar strength, a history that suggests caution is warranted.
Strategic Positioning and Technical Considerations
Given these crosscurrents, we are using options to express our view instead of trading the spot market directly. Buying EUR/USD call options allows for participation in further upside while defining our maximum loss if sentiment suddenly sours. The recent rise in one-month implied volatility from around 7% to over 9% in the past week confirms the broader market is also bracing for a significant price swing.
Looking at the bigger picture, the fact that nearly 20% of global petroleum consumption passes through the Strait of Hormuz means any breakdown in the deal will have major economic consequences. The current EUR/USD level near 1.1600 is approaching a technical resistance zone we haven’t seen tested since 2021. For these reasons, traders with existing long positions should consider purchasing put options as a hedge against a sudden downturn in the coming weeks.
