EUR\/USD traded lower near 1.1715 in early Asian trading on Wednesday, with the US Dollar supported by uncertainty over a possible Middle East ceasefire. Markets are focused on the US Federal Reserve rate decision later on Wednesday.<\/p>\n
Donald Trump said Iran asked the US to lift a naval blockade of the Strait of Hormuz while talks continue to end a two-month war. CNN reported that mediators in Pakistan expect Iran to submit a revised proposal within the next few days.<\/p>\n
Iran has said it will not open the waterway while the US blockade remains in place. This keeps uncertainty elevated and supports demand for the US Dollar.<\/p>\n
The Fed is expected to keep rates unchanged at 3.50% to 3.75% at its April meeting, which would be the third straight hold. Traders will watch Jerome Powell\u2019s press conference for signals on the path ahead.<\/p>\n
Attention then turns to the ECB decision on Thursday, with expectations of a hawkish hold and possible rate rises in June or July. Goldman Sachs forecasts two 25 bps hikes, in June and September, taking the deposit rate back to 2.50%.<\/p>\n
In 2022, the Euro accounted for 31% of FX trades, with daily turnover above $2.2 trillion. EUR\/USD represents about 30% of FX turnover; EUR\/JPY 4%, EUR\/GBP 3%, and EUR\/AUD 2%.<\/p>\n
We see echoes of the situation back in 2025, where geopolitical risk drove flows into the US Dollar, putting pressure on the Euro. With EUR\/USD currently struggling around 1.05 amid renewed tensions in the Middle East, the dollar’s safe-haven appeal is once again a dominant market theme. This week’s central bank decisions will be critical for setting a direction for the coming weeks.<\/p>\n
The market is pricing in a hold from the Federal Reserve, keeping the federal funds rate in its current 4.00% to 4.25% range. Recent inflation data, with the core Consumer Price Index (CPI) remaining stubbornly above 3% last quarter, has pushed back expectations of any near-term rate cuts. This policy stance supports a strong dollar, especially as the US economy continues to show resilience with Q1 2026 GDP growth reported at a healthy 2.1%.<\/p>\n
Across the Atlantic, the European Central Bank is also expected to hold its deposit rate at 3.00%, but its challenge is different. While Eurozone inflation has cooled, sluggish economic performance, particularly with Germany’s manufacturing PMI contracting for a fourth straight month, makes a hawkish policy difficult to justify. This economic divergence makes a sustained rally in the Euro unlikely.<\/p>\n
For derivative traders, this suggests owning volatility could be a prudent strategy. We believe long straddles or strangles on EUR\/USD options could be effective, as they would profit from a significant price swing following the central bank announcements, regardless of the direction. Implied volatility for one-month options has already risen to 8.2%, reflecting the market’s uncertainty, but a surprise could easily push actual volatility higher.<\/p>\n
For those with a directional view, the path of least resistance appears to be a weaker Euro. The interest rate differential, with US 2-year yields offering a premium of over 120 basis points compared to German bunds, creates a positive carry for holding short EUR\/USD positions. However, any unexpected de-escalation of global tensions could trigger a sharp relief rally, making disciplined risk management essential for any short futures or forward positions.<\/p>\n
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