The euro rose 0.26% late in the North American session as the US dollar weakened. EUR/USD traded at 1.1654 after rebounding from 1.1608.
Market sentiment was neutral as headlines about Iran influenced the session. Donald Trump said the US would delay an attack on Iran to resume talks, while WTI remained up by more than 1%.
Markets React To Geopolitical And Rate Signals
US inflation data last week led markets to factor in higher Federal Reserve rates rather than cuts. The 10-year US Treasury yield was down 1 basis point at 4.585% after rising on Friday.
Prime Terminal data showed a 50% chance of a US rate increase towards the end of 2026. Chicago Fed President Austan Goolsbee said inflation is still too high and the job market is stable, warning that rate cuts could lift inflation.
Kevin Warsh is due to be sworn in as Fed Chair on Friday, May 22, at the White House. In the euro area, there was no major data, but a Reuters poll pointed to expectations for an ECB rate rise in June and at least one more.
EUR/USD faces resistance near the 200-, 100- and 20-day SMAs at 1.1681, 1.1703 and 1.1707. Support is near 1.1600, then 1.1505, with resistance around 1.1750/1.1760 and 1.1800.
Trade Structure And Risk Management
The delay in the Iran strike offers a temporary calm, but we should see this as an opportunity to price in higher volatility on geopolitical risk. The oil volatility index, OVX, is already up 15% this month, reflecting ongoing tension. We can use options on crude oil futures or energy ETFs to protect against sudden price spikes should the situation escalate again.
The European Central Bank seems locked into a June rate hike, especially with core inflation recently reported for the Euro area at a stubborn 3.1%. Investors are now pricing in at least two hikes from the ECB by the end of the year, which should continue to support the Euro against the dollar. This reinforces the case for maintaining long EUR positions through derivatives.
The real wildcard for the US Dollar is Kevin Warsh taking over the Fed this Friday, and we know his track record suggests a hawkish bias against inflation. This transition comes just after last week’s US Consumer Price Index showed inflation persisting above 3.5%, making the outgoing Goolsbee’s comments very relevant. The uncertainty before his first public statements makes buying short-dated EUR/USD call options an interesting play.
We should use the technical levels to structure these trades. Setting up call spreads with strikes above the 1.1707 moving average could capture a breakout towards 1.1800. Meanwhile, buying puts with a strike below 1.1600 offers a defined-risk way to hedge against a drop towards the April low of 1.1505.
Looking back from our perspective in 2025, we saw a similar setup in 2022 when an energy shock forced central banks to hike rates aggressively. That period was defined by sharp, unexpected moves in currency markets. This historical precedent suggests we should remain nimble and perhaps favor strategies that profit from large price swings.
