The euro ended March near 1.15, after falling by more than 2% against the US dollar during the month, its weakest monthly result in almost a year. It peaked near 1.16 in early April, then moved lower as the US gave no clear schedule for ending military action linked to Iran.
A revised quarterly path includes a possible low at 1.13 in Q2, followed by a move to 1.18 in Q4. A recovery towards 1.18–1.20 is tied to easing tension in the Middle East and lower oil prices.
Euro Outlook And Key Drivers
Markets are pricing a little more than two European Central Bank rate rises in 2026, up from zero before the conflict. The view presented is that this pricing is too high, with the ECB expected to stay on hold.
Risk scenarios depend on the Strait of Hormuz and energy supply. A rapid de-escalation supports a faster move back to 1.18–1.20, while a blockade lasting through the summer refill season could delay recovery and push EUR/USD below mid-March lows.
We have seen EUR/USD fall from its early April peak near 1.16, now trading around 1.1420 as the Iran situation remains unresolved. The energy shock is real, with Brent crude oil prices staying elevated around $105 per barrel after spiking last month. This uncertainty keeps the pair trapped, with a potential slide towards 1.13 looking more likely in the short term.
The market is now pricing in more than two ECB rate hikes for this year, a sharp reversal from just a month ago. We believe this is excessive, as ECB officials have recently voiced concern over tightening policy into an energy shock that is already hurting consumers. Looking back at 2025, the Eurozone economy was only showing modest growth, making aggressive hikes a significant risk to a fragile recovery.
Options Volatility And Trading Approaches
Implied volatility in EUR/USD options has surged, with the 3-month measure now sitting near 11.5%, its highest level in over a year. This makes buying options costly, but it presents opportunities for strategies that capitalize on either a sharp move or a period of calm. Given the wide range of possible outcomes, traders could consider buying long-dated call options to position for an eventual recovery, while using shorter-term put options to hedge against a further decline if the Strait of Hormuz situation worsens.
We must remember the summer of 2022, when severe energy supply fears pushed the euro below parity with the dollar for the first time in two decades. If the current tensions around the Strait of Hormuz are not resolved before Europe’s summer gas storage refill season, we could see a repeat of that severe pressure. This historical precedent highlights the significant downside risk if diplomacy fails in the coming weeks.
