EUR/USD fell on Tuesday as the US Dollar steadied and Eurozone sentiment weakened, though losses were limited and the pair stayed near recent highs amid uncertainty over possible US-Iran talks. It was trading near 1.1755, while the US Dollar Index was around 98.32.
US Retail Sales rose 1.7% month-on-month in March, above the 1.4% forecast and up from 0.7% in February, with higher petrol prices linked to tensions with Iran. The Retail Sales Control Group increased 0.7% and Retail Sales excluding Autos rose 1.9%, both above expectations.
Labour data also improved, with the ADP Employment Change 4-week average rising to 54.8K from 39K. The figures point to ongoing US economic strength and may support a longer period of unchanged Federal Reserve policy, with oil-related inflation risks still monitored.
Kevin Warsh, a Fed Chair nominee, called for a new inflation framework and described a policy “regime change”, while criticising reliance on forecasts. Focus also remained on a ceasefire deadline on Wednesday and uncertainty about further talks in Pakistan after a weekend incident in the Strait of Hormuz, with Iran yet to confirm participation.
The recent beat on US Retail Sales points to a resilient American consumer, a trend we see supported by the latest US CPI data holding firm at 3.1%. This contrasts sharply with the Eurozone, where the most recent Manufacturing PMI dipped to 49.5, signaling a potential contraction. Therefore, we should consider strategies that benefit from a stronger dollar against the euro, such as buying puts on the EUR/USD pair.
With the US-Iran ceasefire deadline approaching this Wednesday, we must prepare for a spike in market volatility. The CBOE Volatility Index (VIX) is already elevated, trading around 22, which reflects the market’s anxiety over this binary event. We could look at buying straddles on oil futures, as a failure in peace talks could send WTI crude, currently near $95 a barrel, significantly higher.
Kevin Warsh’s call for a new inflation framework introduces long-term uncertainty about Federal Reserve policy, which is a major shift from the predictable stance we saw through much of 2025. Given the strong economic data, market expectations reflected in Fed Funds futures now price a 60% probability of a rate hike at the next meeting. We can use options on SOFR futures to position for a potentially more hawkish Fed than the market has been accustomed to.
The Dollar Index holding above 98 is a direct result of this divergence between a robust US and a softer Eurozone. However, this trend is fragile and hinges entirely on the outcome of the Iran negotiations this week. We will be closely watching for any official statements from Tehran, as confirmation of their participation in talks could quickly reverse recent dollar gains.
