EUR/USD rose on Tuesday as the US Dollar weakened after a recent rally, ending the Euro’s five-day losing run. The pair traded near 1.1551, up almost 0.75% on the day, but it was still set to finish the month lower amid Middle East tensions.
The US Dollar Index traded near 99.90 after reaching 100.64, a ten-month high, earlier in the session. The pullback followed improved risk appetite after a Wall Street Journal report said Donald Trump told aides he is willing to end the US military campaign against Iran even if the Strait of Hormuz stays largely closed.
Dollar Retreat And Risk Appetite Shift
Iran’s President Masoud Pezeshkian said Iran is ready to end the war but wants guarantees, while attacks in the Gulf continued. US Defence Secretary Pete Hegseth said “the coming days will be decisive” and that “there is nothing Iran can do about it.”
Oil prices rose sharply amid supply disruption risks through the Strait of Hormuz, and Eurozone inflation moved above the ECB’s 2% target. HICP rose 1.2% month-on-month in March from 0.6%, while year-on-year inflation rose to 2.5% from 1.9%, below the 2.7% forecast.
Core HICP rose 0.8% month-on-month, with the annual rate at 2.3%, below 2.4% forecast and the prior reading. Markets still price about two ECB rate rises by year-end, while expecting the Fed to hold rates unchanged through most of 2026.
The US Dollar’s pullback from its recent highs gives us a window of opportunity. This easing is directly linked to reports suggesting a potential end to the US campaign against Iran, which has calmed market nerves for now. Volatility, as measured by the VIX index which spiked above 30 last week, is starting to recede from its recent peaks, offering a clearer picture for short-term trades.
We see the Eurozone’s recent inflation figures as the main driver for the Euro’s strength. The March headline inflation jumping to 2.5% forces the European Central Bank’s hand, making future interest rate hikes more likely. This puts the ECB on a diverging path from the Federal Reserve, which is a classic setup for currency pair appreciation.
Trade Setup And Risk Management
For traders, this environment favors long positions on EUR/USD, but the situation remains fragile. Using options, like buying call spreads on the EUR/USD, could be a prudent strategy to capture potential upside while limiting risk. This approach protects against a sudden reversal if Middle East tensions escalate again and send the Dollar soaring.
This situation feels very similar to what we saw back in 2022 when the energy crisis first hit Europe. Back then, the ECB was forced to hike rates aggressively to fight inflation, even with a slowing economy. We should anticipate similar policy pressures now, which historically supports the Euro against currencies with a more neutral central bank.
Keep a close eye on oil prices, as they are the primary catalyst for this entire market dynamic. With Brent crude having recently traded above $115 per barrel, any news from the Strait of Hormuz will directly impact inflation expectations and central bank policy. The futures market is currently pricing in sustained high energy costs for at least the next two quarters.
On the other side of the trade, the Federal Reserve appears locked into a holding pattern. Recent US data, such as the latest Core PCE inflation reading which has been steadily cooling toward 2.1%, gives them room to wait and see. This policy divergence with a more hawkish ECB is the fundamental reason we favor the Euro over the Dollar in the coming weeks.
