The Euro fell against the US Dollar on Thursday, with EUR/USD near six-week lows around 1.1585 after an intraday high of 1.1635. Moves were linked to headlines on US-Iran talks and the Strait of Hormuz.
The US Dollar strengthened as doubts remained over whether Washington and Tehran can reach a deal to end the war and reopen the strait. Iran’s nuclear programme remained a central issue.
Dollar Strength Driven By Geopolitical Risk
The US Dollar Index (DXY) traded around 99.40, its highest level since April 7. Reuters cited two senior Iranian sources saying Iran’s Supreme Leader ordered near-weapons-grade uranium to stay in the country, while Al Jazeera reported an Iranian official denied this.
Oil prices stayed high, adding to inflation concerns and raising expectations of a Federal Reserve rate rise by year end. The 10-year US Treasury yield held near the 16-month highs seen earlier this week.
Higher energy costs also raised concerns for the Eurozone due to its reliance on imported energy. Traders assessed May PMI data from both regions.
In the US, Composite PMI was 51.7, Manufacturing PMI rose to 55.3 from 54.5, a 48-month high, and Services eased to 50.9 from 51. In the Eurozone, Composite PMI fell to 47.5 from 48.8, a 31-month low, Services dropped to 46.4 from 47.6, a 63-month low, and Manufacturing eased to 51.4 from 52.2, a three-month low.
How Conditions Have Changed Since Last Year
We recall that this time last year, in May 2025, the Euro was under significant pressure against the US Dollar, trading near 1.1585. This weakness was driven by a strong dollar fueled by geopolitical uncertainty surrounding US-Iran negotiations and concerns over the Strait of Hormuz. The market was also pricing in a hawkish Federal Reserve due to elevated oil prices, while the European Central Bank was seen as having limited room to act.
Today, the landscape has shifted considerably, creating a different set of opportunities. Current US inflation has cooled to 2.8% year-over-year, leading the Federal Reserve to signal a pause in its hiking cycle, a stark contrast to the aggressive bets we saw in 2025. Meanwhile, Eurozone core inflation remains persistent at 3.1%, prompting hawkish commentary from several ECB governing council members this month.
This monetary policy divergence is now favoring the Euro, a reversal from last year’s dynamic. The US Dollar Index (DXY) has retreated from those 2025 highs around 99.40 and is currently trading near 96.50. Consequently, the EUR/USD has shown strength, breaking above the 1.1900 level for the first time since late 2024.
The economic data further supports this changing narrative. The latest flash PMI data for May 2026 shows the US Composite PMI slipping to 50.8, indicating a slowdown, whereas the Eurozone Composite PMI has climbed to 54.2, its highest level in 18 months. This contrasts sharply with May 2025, when the Eurozone PMI was languishing at a 31-month low of 47.5 while US activity held firm.
Given this backdrop, traders should consider positioning for further Euro strength against the US dollar. Buying EUR/USD call options with a three-month expiry could be an effective way to capitalize on the sustained economic and policy divergence. This strategy offers defined risk while maintaining exposure to potential upside as the pair targets the 1.2000 psychological level.
Alternatively, for those looking to express this view with lower initial outlay, a bullish risk reversal on EUR/USD is attractive. This involves selling an out-of-the-money put option to finance the purchase of an out-of-the-money call option. This structure is well-suited for the current environment where we anticipate a steady upward grind rather than a spike in volatility.
