EUR/USD remained under pressure on Thursday as Middle East tensions supported the US Dollar. The pair traded near 1.1537 after touching a low of 1.1509.
The US Dollar Index traded near 100 after an earlier high of 100.26. Market volatility stayed elevated as headlines on the US-Iran conflict shifted.
Escalation Risks Support The Dollar
De-escalation hopes eased after Donald Trump said military operations would continue and gave no clear timeline. Oil prices then rose on supply disruption fears linked to the Strait of Hormuz.
Higher oil prices led traders to reassess central bank policy as energy costs can lift inflation and weigh on growth. Markets priced in two to three European Central Bank rate rises by year-end, while the Federal Reserve was expected to keep rates steady through 2026.
The Eurozone was described as more exposed to an energy shock due to reliance on imported energy, while the US was described as a net exporter. Eurozone inflation was described as closer to the ECB’s 2% target, while US price pressures were described as more elevated.
ECB policymaker François Villeroy de Galhau said the next move in key rates was “highly likely to be upwards”. He said “market inflation expectations have risen sharply” and that conditions were closer to the ECB’s adverse intermediate scenario than the baseline.
Attention Turns To Key US Data
Focus turns to Friday’s US Nonfarm Payrolls report for clues on Fed policy and near-term EUR/USD direction.
We are seeing EUR/USD struggle around the 1.0750 mark as renewed tensions in the Middle East strengthen the US Dollar. This safe-haven demand has pushed the US Dollar Index (DXY) up to 104.30, its highest level in over a month. The market is reacting to concerns over potential disruptions to oil shipments through the Strait of Hormuz.
This situation feels very familiar to what we experienced in the second half of 2025. Back then, a similar geopolitical flare-up caused Brent crude prices to surge nearly 15% in a single quarter, pushing the dollar higher on safety flows. We are seeing that pattern repeat now, with Brent jumping from a stable $82 to over $94 a barrel in just the last two weeks.
The sudden spike in energy costs is forcing traders to reconsider central bank policies, especially with the Eurozone being more vulnerable to energy shocks than the United States. Markets are now pricing in a 60% probability of a European Central Bank rate hike by July, up from just 25% a month ago. In contrast, Fed funds futures show traders still expect the Federal Reserve to remain on hold through the third quarter.
Given this uncertainty, derivative traders should look at options to manage risk and capitalize on rising volatility. Implied volatility on one-month EUR/USD options has already climbed from 5.8% to 7.9%, suggesting that buying puts to hedge against further downside could be a prudent strategy. Alternatively, constructing strangles could benefit from a significant price move in either direction, which seems likely.
The Eurozone’s heavy reliance on imported energy makes it particularly susceptible, which could weigh on the Euro even if the ECB talks tough on inflation. The latest Eurostat data from March 2026 showed headline inflation was already proving sticky at 2.6%, and this oil shock will only add to that pressure. The US, being a net energy exporter, is in a much more insulated position.
Looking ahead, all attention will be on next week’s US Consumer Price Index (CPI) report. The previous Nonfarm Payrolls report in March showed a solid but not spectacular gain of 215,000 jobs, which has kept the Fed in a wait-and-see mode. A hot CPI reading, however, could shift that narrative quickly and add more fuel to the dollar’s rally.