The Euro rose against the US Dollar on Tuesday as a mild drop in Oil prices pushed US Treasury yields lower. EUR/USD traded near 1.1701 after an intraday low of 1.1676.
Gains in EUR/USD were limited as risk mood stayed weak after renewed fighting in the Middle East. The US Dollar Index was near 98.40, down about 0.07% on the day.
Middle East Tensions And Market Reaction
Fresh attacks in the Gulf on Monday raised doubts about how long the ceasefire may last. US Defence Secretary Pete Hegseth said the ceasefire with Iran is “not over”, and said President Donald Trump will decide if recent tensions break it.
This reduced fears of an immediate escalation and helped Oil prices fall, with WTI down around 3%. Oil prices still stayed high overall, keeping inflation risks in view and affecting rate outlooks.
Markets priced in at least two European Central Bank rate rises this year, while doubts remained due to the Eurozone’s exposure to energy shocks. ECB member François Villeroy de Galhau said he does not yet see “sufficient signs for a rate hike”, but said rates may rise if there are second-round effects.
In the US, FedWatch showed the Federal Reserve likely to hold rates soon, while the chance of a December rate rise rose to around 27% from near zero a week ago. JOLTS openings fell to 6.866 million in March from 6.922 million, and ISM Services PMI eased to 53.6 in April from 54.
Rate Differentials And The Stronger Dollar
We see the EUR/USD is trading around 1.0850, a stark difference from the 1.1700 levels we recall from the geopolitical flare-ups of 2025. That period’s temporary oil price pullback offered a false sense of relief. Today, the Greenback’s strength is more persistent due to a clearer interest rate advantage.
Oil prices are now consistently holding around $85 per barrel for WTI crude, which is keeping inflation sticky on both sides of the Atlantic. In the Eurozone, the latest Harmonised Index of Consumer Prices (HICP) data for April showed inflation at a stubborn 2.6%, still above the ECB’s target. This reinforces the “higher for longer” rate environment that has suppressed the euro’s upside.
The European Central Bank is consequently expected to keep its main deposit rate firm at 3.75% through the summer, a scenario we see reflected in EURIBOR futures contracts. This contrasts with the situation in 2025, when the market was uncertainly pricing in two hikes. Now, the focus for options traders is on the timing of any potential rate cut, not a hike.
In the US, the narrative is similar but more pronounced, with the latest CPI reading showing inflation at 3.1%. The Federal Reserve is holding its ground with a target rate of 4.50%, creating a significant yield advantage that continues to attract capital to the dollar. This rate differential is the primary headwind for any significant EUR/USD rally.
Given this backdrop, we should anticipate continued range-bound trading with elevated volatility, making options strategies attractive. The VSTOXX, a measure of Eurozone equity volatility, has recently climbed to 18, signaling increased market nervousness about upcoming inflation data. Traders should consider buying straddles or strangles on the EUR/USD to profit from sharp moves in either direction following the release of key inflation and employment figures in the weeks ahead.
