EUR/USD edged up to about 1.1635 in early Asian trading on Tuesday, holding above 1.1600, but gains were capped by fresh geopolitical strain. Iran said it would stop exchanging messages with the US via intermediaries and move to fully close the Strait of Hormuz, raising the prospect of a risk-off tone that tends to favour the US dollar. Markets also await the Eurozone’s preliminary Harmonised Index of Consumer Prices (HICP) reading later on Tuesday.
In Washington, President Donald Trump said he urged Israel’s Prime Minister Benjamin Netanyahu not to proceed with a major raid on Beirut, adding that Israeli troops were turned around, while Netanyahu said operations against Hezbollah in southern Lebanon would continue. The European Central Bank’s hawkish lean offered some counterweight for the euro after executive board member Isabel Schnabel warned that inflationary effects linked to the Iran conflict had spread beyond energy, increasing the risk of unanchored inflation expectations. In broader euro context, the currency is used by 20 EU countries; in 2022 it accounted for 31% of global FX transactions, with average daily turnover above $2.2 trillion, while EUR/USD represents an estimated 30% of all trades.
Competing Forces in EUR/USD Dynamics
We are seeing the EUR/USD pair caught between two powerful forces, creating a complex trading environment. On one hand, the European Central Bank is signaling a hawkish stance to fight inflation, which should support the Euro. On the other, escalating Middle East tensions are boosting the US dollar’s appeal as a safe-haven asset.
The threat from Iran to close the Strait of Hormuz is a significant market driver, reminiscent of the oil shocks of the 1970s that led to global stagflation. Brent crude futures have already surged over 8% in the last 48 hours to breach $95 a barrel, a level not seen since late 2025. This situation is complicated by the Eurozone’s own inflation, with last month’s core HICP reading coming in at a stubborn 3.1%, well above the ECB’s target.
Risk Management and Market Strategy
This clash suggests that outright directional bets are risky, and we should instead focus on volatility. We are considering purchasing long straddles on EUR/USD, a strategy that profits from a large price move in either direction. A major geopolitical event could send the pair tumbling, while a surprisingly high inflation number could cause it to spike.
Given the immediate risk of a flight to safety, we are also looking at downside protection. Buying out-of-the-money put options with expirations in the next three to four weeks offers a cost-effective way to hedge against a sudden drop. We see significant risk if the pair breaks below the psychological 1.1500 level.
We will be closely monitoring the flash PMI data for Germany and France due out in the third week of June. Recent data from the ZEW Economic Sentiment survey showed a dip in expectations, suggesting high energy costs may already be weighing on Europe’s largest economies. Any further weakness would complicate the ECB’s ability to remain hawkish and could pressure the Euro.
The Cboe EuroCurrency Volatility Index (EVZ) has already ticked up to a three-month high of 8.5, reflecting the market’s growing nervousness. We expect this implied volatility to increase further as these opposing narratives play out. This supports our view that being long options premium is the prudent approach in the coming weeks.
