EUR/USD edged down to around 1.1630 in Asian trading on Wednesday after little movement the prior day, as the US Dollar held firm on safe-haven demand linked to stalled US-Iran negotiations and renewed Middle East tensions. US Central Command said it repelled Iranian missile and drone attacks aimed at Kuwait and Bahrain, and ABC News reported US self-defence strikes on military targets on Iran’s Qeshm Island. The risk of a Strait of Hormuz closure has added to concerns over higher energy prices and stronger global inflation pressure, supporting expectations that the Federal Reserve will keep interest rates elevated for longer.
US data also leaned supportive for the Dollar. ISM Manufacturing PMI rose to 54 in May 2026 from 52.7 over the prior two months, marking the strongest expansion since May 2022, while April JOLTS showed job openings at 7.6118 million, a near two-year high, alongside falling layoffs. In the euro area, HICP inflation accelerated to 3.2% year-on-year in May from 3%, in line with forecasts, keeping attention on European Central Bank policy as officials referenced long-term expectations being anchored, described a June move as an “insurance hike”, and said expectations resemble levels seen four years ago, while urging timely action to prevent further price pressures.
Safe-Haven Demand And Geopolitical Tensions Drive Dollar Strength
We see the US Dollar strengthening due to serious tensions in the Middle East, pushing EUR/USD lower. This safe-haven demand for the dollar will likely continue as long as the conflict near the Strait of Hormuz persists. The immediate geopolitical risk is the primary driver for currency markets this week.
The threat of closing the Strait of Hormuz is a major concern for inflation, as it handles about 21% of global petroleum liquids consumption. Historically, such disruptions cause significant oil price spikes, with Brent crude having jumped over 15% in a single day during similar tensions in 2019. We are therefore anticipating renewed inflationary pressures, which supports the Federal Reserve’s case for keeping interest rates high.
Strong US economic data, including a four-year high in manufacturing PMI and a surge in job openings, further solidifies our expectation for a hawkish Fed. All eyes are now on Friday’s Nonfarm Payrolls report, where a strong number above the 190,000 consensus would almost certainly eliminate any lingering thoughts of a near-term rate cut. This fundamental backdrop favors continued dollar strength against the euro.
ECB Hawkishness And Trading Strategy Amid Event Risks
However, we are also watching the European Central Bank, which is sounding increasingly hawkish in response to its own inflation challenges. With Eurozone inflation ticking up to 3.2%, policymakers are openly floating the idea of a precautionary “insurance hike” this month. This limits the downside for the euro and creates a tense tug-of-war against the dollar.
Given the uncertainty ahead of the payrolls report, we believe implied volatility in EUR/USD is too low. We are positioning for a large price swing by purchasing short-dated option straddles, which will profit from a significant move in either direction. This is a prudent way to trade the upcoming event risk without betting on the outcome.
For a more directional play, we see value in buying EUR/USD put options with a one-to-two week expiry. This strategy offers a defined-risk way to profit if geopolitical fears and a strong US jobs report push the currency pair lower. The key support level we are watching is 1.1500, a breach of which could trigger further selling.
