EUR/USD rose on Wednesday as the US Dollar weakened, with risk mood supported by hopes of renewed US-Iran talks. The pair extended gains for an eighth straight day, with moves driven more by Dollar softness than Euro strength.
The pair traded near 1.1800, close to one-month highs, while activity stayed calm due to limited fresh geopolitical news. The US Dollar Index (DXY) was around 98.10, near the six-week low reached on Tuesday.
Markets awaited confirmation of a second round of talks after Donald Trump said negotiations could happen “over the next two days” in Pakistan. He also said “the Iran war can be over very soon.”
Expectations of a deal followed last week’s talks that ended without a breakthrough and led the United States to impose a naval blockade on the Strait of Hormuz. The Washington Post reported the Pentagon is preparing to deploy thousands of additional troops to the Middle East in the coming days.
Oil-led inflation risks continued to affect Federal Reserve and ECB rate expectations, even as oil prices fell from recent highs. Crude remained above pre-conflict levels, with markets expecting the Fed to hold rates and pricing possible ECB rate rises.
Eurozone inflation data is due Thursday after preliminary figures showed a rise that pushed inflation above the ECB’s 2% target. ECB policymaker Joachim Nagel said April’s decision will hinge on Strait of Hormuz developments, while Cleveland Fed President Beth Hammack said rates are “in a good place” and may stay on hold “for a while.”
Looking back at the situation in early 2025, we saw the EUR/USD rally to 1.1800, driven largely by hopes of a US-Iran de-escalation that weakened the dollar. Today, the picture is vastly different, with the pair trading much lower around 1.0750 as the Dollar Index (DXY) sits strong near 105.50. The focus has shifted decisively away from short-term geopolitical headlines to the longer-term monetary policy divergence between the Fed and the ECB.
The market expectations we saw in 2025, which priced in a holding Fed and a potentially hiking ECB, have been completely upended. Instead, both central banks executed aggressive rate-hike cycles to combat inflation, and now the key question is who will be the first to cut rates. This fundamental shift means traders should be less reactive to Middle East headlines and more focused on the relative economic data between the US and the Eurozone.
Inflation, which was a budding concern then, remains the central issue, although the drivers have broadened beyond just oil prices. With the latest Eurozone HICP inflation at 2.4% and US CPI running hotter at 3.1%, both central banks are cautious about declaring victory. This persistent inflation keeps the possibility of “higher for longer” rates on the table, creating uncertainty about the timing of any policy pivot.
For derivative traders, this means the nature of volatility has changed. Short-dated options that were useful for trading on unpredictable geopolitical news in 2025 are less relevant now. The focus should be on options strategies that capture volatility around scheduled events like central bank meetings and major inflation data releases for both the US and Eurozone.
Therefore, positioning for the coming weeks should involve looking at structures that benefit from policy divergence. For example, buying straddles or strangles ahead of key US Personal Consumption Expenditures (PCE) or Eurozone inflation reports could be effective. Furthermore, trading options on the interest rate spread between German and US bonds can offer a more direct way to play the evolving expectations of who will cut rates first.
