The euro fell for a third straight session against the US dollar on Thursday, with EUR/USD still boxed into an roughly 80-pip band around 1.1600 and holding above 1.1575. Geopolitical risk helped set the tone as reports of fresh US attacks on Iran, alongside Tehran’s claim of a strike on a US base in the Gulf and Kuwait’s interceptions of missiles and drones, kept the ceasefire under strain. That reduced expectations of a rapid reopening of the Strait of Hormuz and lifted Brent above $94 after trading below $92 on Wednesday, adding pressure to the single currency.

Policy expectations remain a counterweight. The ECB Watch Tool implies a 91% probability of a 25 basis-point Deposit Rate increase to 2.25% at the June 11 meeting. In the US, April’s Personal Consumption Expenditures Price Index is due later, with markets looking for confirmation that inflation pressures persisted, a backdrop that could reinforce tighter Fed policy expectations and underpin the dollar. Technically, EUR/USD traded near 1.1610, with resistance around 1.1660 and support at 1.1575, while downside levels were flagged at 1.1505-1.1525 and upside targets at 1.1720 then 1.1790.

Range-Bound Trading and the Volatility Opportunity

Given the current situation, we see the EUR/USD pair trapped in a tight range, and the upcoming US PCE inflation report will likely be the catalyst that forces a breakout. The key is to position for a significant move rather than betting on a specific direction. Options strategies that benefit from an increase in volatility are therefore the most logical approach in the coming weeks.

The pressure on the Euro is significant, largely due to the renewed conflict in Iran pushing Brent crude oil above $94 a barrel. This situation is reminiscent of the 2022 energy crisis, which drove the Euro down towards parity with the dollar as Europe’s energy import costs skyrocketed. With the US being more energy independent, sustained high oil prices historically favor the dollar over the euro.

ECB Rate Hike Expectations and Strategic Responses

However, a strong floor is being built under the Euro by the European Central Bank. Recent flash estimates for Eurozone inflation show it remains sticky at 2.6%, still well above the bank’s 2% target, justifying the hawkish commentary from policymakers. The market has priced in a 91% probability of an ECB rate hike in June, which is preventing the Euro from falling further.

Therefore, we believe the best response is to buy volatility. A long straddle, which involves buying both a call and a put option with a strike price near the current level of 1.1600, is an ideal strategy. This position will be profitable if the EUR/USD makes a sharp move either up or down, breaking out of its current range after the PCE data is released.

This view is supported by looking at currency volatility indexes, which are elevated but not yet at levels seen during major crises. This suggests that while the market is nervous, the cost of purchasing these options has not become prohibitively expensive. We are essentially positioning for the existing tension to finally snap, breaking the pair out of the 1.1575-1.1660 channel it has been stuck in.