The euro recovered from weekly lows but stayed down against the dollar on Thursday, with EUR/USD back above 1.1600 after touching 1.1586 and extending a third consecutive daily decline. Risk appetite weakened after reports of further US attacks on Iran, while Tehran said it had struck a US base in the Gulf and Kuwait reported intercepting missiles and drones. The tension kept open the risk of disruption to the Strait of Hormuz and lifted Brent crude above $94, after trading below $92 on Wednesday.
Beyond the immediate move, the pair remained range-bound as markets continued to price tighter European Central Bank policy. The ECB Watch Tool indicated a 91% probability of a 25 basis-point increase in the Deposit Rate to 2.25% at the 11 June meeting. In the US, attention turned to April’s PCE Price Index, alongside Durable Goods Orders and Initial Jobless Claims. Technically, EUR/USD traded near 1.1610 within an 80-pip band between 1.1575 and 1.1660, with RSI below its midline and MACD slightly negative; a break under 1.1575 would expose 1.1505–1.1525, while a move above 1.1660 would open 1.1720 and then 1.1790.
Geopolitical Tensions and Economic Impact
We see the Euro as vulnerable due to rising tensions in Iran, which are pushing oil prices higher and making investors cautious. This risk-off sentiment naturally benefits the US Dollar as a safe haven, putting pressure on the EUR/USD pair. The recent spike in the CBOE Volatility Index (VIX) to over 19 from 15 earlier this month confirms this growing market anxiety.
The surge in Brent crude to over $94 a barrel is a significant headwind for the Euro. As a net energy importer, the Eurozone economy is more sensitive to high oil prices than the United States. Historically, periods of rapidly rising energy costs, like the shock in 2022, have preceded economic slowdowns in Europe and weighed heavily on the currency.
Central Bank Policy and Market Strategy
Despite this, the Euro is finding some support from expectations of a European Central Bank interest rate hike on June 11. Recent inflation data for the Eurozone showed consumer prices rising at an annual rate of 2.7% in April, remaining stubbornly above the ECB’s target. This reinforces the view that the bank must act, putting a floor under the Euro for now.
On the other side of the Atlantic, last week’s Personal Consumption Expenditures (PCE) data in the US showed core inflation at 2.9%, higher than anticipated. This strong reading keeps the pressure on the Federal Reserve to maintain its restrictive stance. This fundamental tug-of-war between central banks is what we believe is keeping the EUR/USD trapped within its current range.
Given these conflicting drivers, we see an opportunity in options that profit from the pair remaining range-bound. Selling volatility by using strategies like an iron condor with strikes outside the 1.1575 to 1.1660 range could be effective in the coming weeks. This approach bets that neither the ECB’s hawkishness nor the geopolitical fears will be strong enough to cause a major breakout.
However, we must remain aware that the situation in the Strait of Hormuz could escalate suddenly. A sudden closure of this key oil route would likely cause a sharp drop in the Euro, breaking below the 1.1575 support level. Therefore, holding some cheap, out-of-the-money put options could serve as a prudent hedge against a sharp downturn.
