EUR/USD was steady near 1.1600 in Asian trading on Wednesday, after modest losses the day before. The pair may fall further if the US Dollar strengthens on rising risk aversion linked to the Middle East conflict.
US President Donald Trump said attacks on Iran could resume in two or three days as part of efforts to reach a deal to end the war. Bloomberg reported a brief pause after Tehran made a new proposal on ending the US–Israeli conflict, while an Iranian official said Iran was prepared to respond to any military aggression.
Federal Reserve Policy Outlook
On monetary policy, Federal Reserve Bank of Philadelphia President Anna Paulson said policy is mildly restrictive and is helping to limit inflation while supporting a stable labour market. She said a rate rise remains possible if growth exceeds potential or if new inflation risks emerge.
The euro received support from comments by European Central Bank officials about possible action in June. Martin Kocher said a June rate rise would be unavoidable if the Hormuz Strait stays closed, and Joachim Nagel said the ECB may need to adjust from its baseline scenario.
A Reuters poll found around 85% of economists now expect a 25 basis point ECB deposit rate rise to 2.25% in June. Before the April meeting, only a little over half expected that outcome.
Looking back at this time in 2025, we recall the market wrestling with EUR/USD around the 1.1600 level. The main tension was between a safe-haven dollar, boosted by conflict in the Middle East, and a euro strengthened by the European Central Bank’s hawkish stance. That specific geopolitical flare-up has since calmed, shifting the market’s focus almost entirely.
Market Conditions And Strategy Shift
The environment today is markedly different, with the pair now trading significantly lower near 1.0750. Both the Fed and the ECB have moved from the aggressive hiking cycles of last year to a more cautious, data-dependent stance on potential rate cuts. This change suggests that trading strategies should now focus more on interest rate differentials and less on sudden geopolitical risk.
For the euro, the ECB’s deposit rate, which was expected to hit just 2.25% last year, now stands at 3.75% after peaking higher. With the latest Eurozone inflation figure at 2.6%, traders should consider that any sign of ECB patience on rate cuts could provide short-term support for the currency. This environment makes strategies that profit from low volatility, like selling out-of-the-money options, more appealing than they were a year ago.
In the United States, the Federal Reserve’s policy rate is at 5.00%, creating a substantial yield advantage that continues to favor the dollar. US inflation is proving stubborn at 3.1%, suggesting the Fed may cut rates more slowly than the ECB. This widening policy divergence makes a carry trade, where traders sell EUR/USD futures to collect the interest rate difference, a logical approach for the weeks ahead.
We have seen one-month implied volatility for EUR/USD fall from the high levels of the 2025 conflict to a more muted 5.8% today. This subdued volatility, combined with the clear but slow-moving central bank paths, presents opportunities for defined-risk option strategies. Traders could look at buying debit call spreads to position for a modest, range-bound increase in the pair’s value.
