EUR/USD eased from session highs near 1.1730 but stayed above 1.1700, extending gains for a second day. German GfK consumer confidence weakened in May, though the immediate market reaction was limited.
The May GfK reading fell to -33.3 from -28.1 in April, below the -29.5 forecast. This was the lowest level in more than three years.
Middle East Proposal Shifts Focus
Attention remained on the Middle East after Axios reported that Iran sent a new peace proposal to the US. The report said Iran would offer to end hostilities and reopen the Strait of Hormuz, with nuclear talks delayed.
Negotiations were described as deadlocked, and a second round of talks due at the weekend was cancelled. Oil tankers have been blocked in Hormuz for two months, with crude near $100 per barrel, raising recession risks.
This week, the Fed and ECB are due to set policy on Wednesday and Thursday. Both are widely expected to hold rates, while the ECB is expected to signal a future hike as inflation rises.
Technically, EUR/USD found support between 1.1645 and 1.1675, with resistance near 1.1730 and around 1.1745. RSI hovered near 50, MACD turned slightly positive, and key levels include 1.1760, 1.1849, and 1.1505–1.1525.
Trading Volatility Into Key Risks
We see the EUR/USD pair caught between hope for a US-Iran peace deal and the reality of oil prices near $100 per barrel, which threatens a global recession. This kind of tension reminds us of the market in early 2022, when geopolitical events sent Brent crude soaring over $120 and market volatility, measured by the VIX, jumped above 35. Derivative traders should therefore focus on strategies that benefit from large price swings, as the current stability is unlikely to last.
The Euro itself faces a major conflict, with dismal German consumer confidence pulling it down while the prospect of a hawkish European Central Bank props it up. This reading of -33.3 is worryingly close to the record lows below -40 seen during the 2022 energy crisis, signaling deep stress in Europe’s largest economy. This fundamental tug-of-war means any news from this week’s ECB meeting could cause an exaggerated move in the currency.
Given the high uncertainty and the binary nature of the Iran peace talks, a non-directional options strategy like a long straddle is worth considering. By buying both a call and a put option with the same strike price near 1.1700, a trader can profit from a significant price breakout in either direction. This is a direct play on rising volatility ahead of the central bank announcements and any news out of the Middle East.
The most significant risk is a total failure of the US-Iran negotiations, which would spark a major flight to safety and strengthen the US dollar. We saw a similar dynamic during the market panic of March 2020, when the Dollar Index (DXY) rallied over 8% in less than two weeks. To guard against this, buying out-of-the-money EUR/USD put options provides a cheap hedge against a sharp drop toward the 1.1500 support level.
From a technical standpoint, the 1.1745 level is the key battleground that will dictate the next move. A decisive break above this trendline could trigger a sharp rally toward 1.1850, making short-dated call options an attractive way to play for that upside. Conversely, a failure to break higher would confirm bearish pressure, suggesting that downside protection remains the more prudent course of action.
