EUR/USD has moved back towards the middle of its 1.1400–1.2000 range, which has held since June last year. The pair peaked at 1.1849 on 17 April after reversing earlier losses linked to the Middle East conflict.
Over the past week, EUR/USD and EUR/GBP fell below 1.1700 and 0.8700, respectively. The move followed weaker euro-zone PMIs and the impact of higher energy prices.
Strait Of Hormuz Risks
US–Iran talks aimed at reopening the Strait of Hormuz have not progressed, leaving the route closed. A longer closure is expected to increase disruption from the energy price shock for the euro-zone economy.
The ECB has set out three scenarios for the euro-zone economy: baseline, adverse, and severe. The ECB President placed current conditions between baseline and adverse, while noting energy prices have not risen enough to match the adverse case and European natural gas prices remain below the baseline.
The ECB is expected to deliver 50 bps of rate rises in total, with the first move delayed until June. This implies short-term policy divergence with the Fed, while narrowing yield spreads have supported the euro and reduced dollar strength.
Given the renewed volatility in global energy markets, we see parallels to the situation that unfolded last year. The euro is again facing headwinds as rising oil prices, now over $95 a barrel due to shipping disruptions in the Red Sea, threaten the Eurozone’s energy-import-dependent economy. Recent German factory orders for the first quarter of 2026 have also fallen by 0.8%, echoing the economic weakness we saw in 2025.
We recall how a similar energy shock in the spring of 2025, following the Strait of Hormuz crisis, pushed EUR/USD back from its peak above 1.1800. That period demonstrated the euro’s sensitivity to geopolitical events in the Middle East and the subsequent drag on the region’s PMI data. History suggests that prolonged energy price shocks tend to hit the Eurozone economy harder than that of the United States.
Options Positioning And Volatility
The European Central Bank is likely to react with caution, just as it did in 2025 when it delayed its first rate hike until June of that year. Current market pricing shows investors have pushed back expectations for the next ECB rate cut to late in the fourth quarter, while the Federal Reserve maintains a hawkish stance. This policy divergence is creating a challenging environment for the euro.
For derivative traders, this points toward positioning for range-bound trading with a downside bias for EUR/USD. The current dynamic resembles 2025’s, but with a widening US-German yield spread, now at 160 basis points, providing less support for the euro than before. Selling call options with strike prices above 1.0950 could be a viable strategy to capitalize on a capped upside.
Alternatively, the heightened uncertainty suggests an increase in volatility may be coming. One-month implied volatility for EUR/USD has already climbed from 6% to 7.5% over the past few weeks. Purchasing a straddle, which involves buying both a call and a put option at the same strike price, could prove profitable if the currency pair makes a sharp move in either direction.
