EUR/USD edged up after slight losses in the prior session, trading near 1.1610 in Asian hours on Monday as the US Dollar weakened on reduced risk aversion. The shift followed reports that the US and Iran had agreed a peace deal to end their nearly four-month war and reopen the Strait of Hormuz, including an immediate and permanent cessation of military operations on all fronts, with references also made to Lebanon. Iran’s National Security Council confirmed a ceasefire framework and said final talks would begin once commitments under a memorandum of understanding are met, while Iranian officials called for the maritime blockade to end immediately and entirely. Attention also remained on the European Central Bank’s first interest rate rise in three years, framed as a pre-emptive move against an inflation surge linked to higher fuel costs. The ECB raised its headline inflation forecasts to 3.0% for 2026 and, separately, 2.3% for 2027 versus prior projections of 2.6% and 2.0%. It also lifted core inflation expectations to 2.5% for both 2026 and 2027, compared with earlier estimates of 2.3% and 2.2%, while money markets priced another increase with September seen as most likely and July still possible.

Impact of Geopolitical Developments and ECB Policy Divergence

With the US-Iran peace deal removing a major source of global uncertainty, we expect the US Dollar’s safe-haven appeal to diminish significantly in the coming weeks. This creates a clear path for risk-sensitive currencies, and we see EUR/USD continuing its push higher from the current 1.1610 level. The market is shifting from a risk-off to a risk-on footing, which typically weighs on the dollar. The immediate reopening of the Strait of Hormuz will have a profound effect on energy markets. This chokepoint handles nearly a fifth of global petroleum liquids consumption, and its closure had kept oil prices elevated. We anticipate a sharp drop in Brent crude prices, potentially below $70 a barrel from their recent highs, which will ease global inflation fears and further reduce demand for the dollar. While the dollar is weakening, the Euro is gaining fundamental support from the European Central Bank. The ECB’s recent rate hike and upgraded inflation forecasts signal a commitment to tightening policy, with money markets pricing in an 85% chance of another hike by September. This policy divergence, with a more hawkish ECB and a less essential safe-haven dollar, provides a powerful tailwind for the Euro.

Trading Strategies in a Lower Volatility Environment

This geopolitical resolution should also crush implied volatility across asset classes. We’ve seen historically that volatility indexes like the VIX can drop by 15-20% in the weeks following the end of major conflicts as uncertainty evaporates. This makes simply buying options less attractive, as they will be losing value from falling volatility, a phenomenon known as “vol crush.” Given this, we are looking to structure trades that are bullish on EUR/USD but also account for declining volatility. Bull call spreads are attractive, such as buying the July 1.1650 call and simultaneously selling the July 1.1800 call. This position benefits from a rise in the pair but reduces the upfront cost and mitigates the impact of falling option premiums. Alternatively, selling premium seems like a strong strategy in this environment. We see an opportunity in selling out-of-the-money put spreads on EUR/USD, for instance, selling the 1.1500 put and buying the 1.1400 put for protection. This generates income and profits as long as the pair remains above our short strike through expiration, benefiting directly from both time decay and the expected drop in volatility.

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