EUR/USD rose on Friday, ending a three-day losing run. It traded near 1.1715, up 0.27%, after touching two-week lows.
The move followed reports of possible renewed US-Iran contacts, which weakened demand for the US Dollar. CNN said President Donald Trump is sending Steve Witkoff and Jared Kushner to Pakistan for talks linked to Iran, after reports that Iran’s Foreign Minister Abbas Araghchi will also travel to Pakistan.
Renewed Diplomatic Signals
Tasnim said Araghchi will set out Tehran’s considerations for ending the war. IRNA said the trip is bilateral with Pakistani officials, meaning contacts with the US are still indirect.
The US Dollar Index eased from about 98.94 to around 98.56, down roughly 0.27% on the day. Uncertainty remains, as Tehran has ruled out negotiations under current conditions and cited the US naval blockade.
Markets are watching whether the US eases the blockade and whether Iran moves to reopen the Strait of Hormuz. The strait remains under a dual blockade, keeping oil prices elevated and inflation in focus.
Next week, attention turns to the Fed and the ECB, both expected to keep rates unchanged. University of Michigan sentiment fell to 49.8 from 53.3, expectations to 48.1 from 51.7, 1-year inflation to 4.7% from 3.8%, and 5-year to 3.5%, the highest since October 2025.
Key Risks And Market Focus
We remember the market whiplash in late 2025 when hopes of US-Iran talks sent EUR/USD above 1.17. That period of high inflation and geopolitical tension set the stage for the cautious central bank policies we see today. Now, with the Strait of Hormuz operating under a fragile truce, any renewed friction could again hit dollar safe-haven demand.
Traders should watch oil prices, as the memory of the dual blockade is still fresh. Brent crude has stabilized around $95 per barrel, down from its peak during the crisis, but this is still high enough to keep inflation as a major concern for policymakers. A sudden flare-up in the region could easily send crude back over $100, forcing the Fed’s hand and creating significant market volatility.
The high inflation expectations we saw develop in 2025, which peaked at 4.7% for the one-year outlook, are the reason the Federal Reserve is holding rates steady today. With the latest US CPI data for March 2026 coming in at a stubborn 3.9%, the Fed remains more hawkish than the ECB. This policy divergence should continue to put underlying pressure on the EUR/USD pair in the weeks ahead.
Given this backdrop, implied volatility in EUR/USD options is relatively low compared to the spikes of last year. This suggests the market may be complacent about geopolitical risks. We believe buying long-dated, out-of-the-money call options on the pair could be a cost-effective way to position for a surprise de-escalation or a dovish turn from the Fed.
The sharp drop in consumer sentiment to 49.8 back in April 2025 was a clear warning sign of economic trouble. While sentiment has since recovered, the latest University of Michigan survey showed a dip to 58.2, indicating consumer unease is returning. This fragility means traders should remain nimble, as any shock could quickly shift the market back to a risk-off footing.
