Published: March 25th, 2026
The euro rose to 1.1536 in early trading this week, recovering modestly as the dollar weakened broadly. That leaves the single currency still under pressure amid intensifying tensions in the Persian Gulf. Market participants remain focused on the risk that disruptions to oil shipments could push energy prices higher and bolster demand for the greenback as a safe haven.
EUR/USD briefly touched the 1.1519 level last Friday before stabilising, suggesting some technical support near last Summer's lows. Analysts at ING said in a note that the euro may consolidate after a rapid decline of roughly 3% over the past two weeks, but warned that further downside remains possible if energy prices continue to climb.
With geopolitical risks mounting and central banks preparing policy signals, investors are bracing for another unsettled week in foreign-exchange markets. Traders entered the recent bout of volatility holding sizable long euro positions, leaving the currency vulnerable to a sharper correction when sentiment turned.
Energy is the critical variable. Europe remains more exposed than America to price volatility in oil and gas, which tend to weigh on the euro through both the trade balance and inflation expectations. The longer prices stay elevated, the more uncomfortable the outlook becomes for the single currency.
At the centre of the current anxiety is the Strait of Hormuz, a narrow maritime chokepoint through which a large share of global oil flows. Tensions involving Iran have raised the prospect of disrupted shipping, with Western governments scrambling to secure transit routes.
Efforts by America to assemble a multinational naval presence have, so far, met a tepid response. That reflects both political caution and the practical reality that Iran retains considerable capacity to harass shipping using relatively unsophisticated means. The asymmetry is striking: safeguarding the strait is costly and complex; disrupting it is not.
For markets, the implication is straightforward. As long as the threat persists, oil prices will carry a risk premium. That, in turn, tends to support the dollar. The greenback benefits both from its role as a haven and from America's relative insulation from energy shocks. Europe enjoys neither advantage.
Speculation that Washington might escalate the conflict further only reinforces this dynamic. A broader confrontation would likely amplify the dollar's appeal, capping any euro rallies and keeping downside risks in play.
Overlaying the geopolitical drama is a crowded monetary-policy calendar. No fewer than 21 central banks are scheduled to deliver decisions or guidance this week, including the Federal Reserve and the European Central Bank.
Both institutions face a similar dilemma. Higher energy prices threaten to push inflation above target just as growth risks mount. The likely response is a firmer tone, what markets would characterise as “hawkish,” even if actual policy moves remain cautious.
Not all scenarios favour the dollar. Markets remain acutely sensitive to the possibility of de-escalation. A pattern has emerged in recent years in which threats of confrontation give way, at the last moment, to negotiation. Traders have nicknamed this tendency the TACO trade (Trump Always Chicken Out), shorthand for the idea that America ultimately pulls back.
Should that pattern repeat, the consequences for currencies could be swift. A reduction in geopolitical risk would likely push oil prices lower, easing inflation concerns and diminishing the dollar's haven appeal. The euro, having borne the brunt of recent weakness, would be well placed to rebound.
Such reversals can be abrupt. Positioning that has built up in anticipation of continued tension can unwind quickly, amplifying market moves. For now, however, investors appear reluctant to bet heavily on de-escalation.
Beyond the immediate drama, subtler shifts are under way in bond markets. Expectations for European interest rates have risen notably in recent sessions, reflecting the anticipated inflationary impact of higher energy costs.
An analyst note from MUFG observed that markets are now pricing in multiple rate increases from European central banks, in some cases more aggressively than in the United States. This has narrowed yield differentials that had previously favoured the dollar.
The effect is to complicate the currency outlook. On the one hand, energy shocks and risk aversion support the dollar. On the other, relatively higher expected rates in Europe lend support to the euro. The interplay of these forces helps explain why, despite recent declines, the euro has not fallen more sharply.
Foreign-exchange markets rarely move on a single narrative. Instead, they reflect the balance of competing pressures. At present, that balance appears finely poised.
Recent developments have prompted a rethink among some large financial institutions. Analysts at Deutsche Bank, for instance, have begun to question their earlier expectation that 2026 would be characterised by broad dollar weakness.
At the start of the year, the case for a softer dollar seemed persuasive. Global growth was improving, America's economic outperformance was fading and capital flows were becoming more balanced. The dollar's long-standing “exceptionalism” appeared to be eroding.
The energy shock has disrupted that narrative. As one note from the bank concluded, the balance of developments over the past fortnight has been “on balance, dollar bullish”. The dollar index has risen modestly this month, while the euro and other major currencies have slipped back.
This dynamic has historical precedent. Periods of rising energy costs and weakening global demand have often coincided with dollar strength. The mechanism is both financial and psychological: capital flows towards perceived stability, and the dollar remains the default destination.
For all the analysis, the immediate outlook for EUR/USD remains unsettled. Geopolitics points one way; interest-rate expectations another. Positioning amplifies moves in both directions. And the ever-present possibility of policy surprises adds an additional layer of complexity.
In such conditions, markets tend to oscillate rather than trend. Sharp moves are followed by equally sharp reversals, leaving little in the way of sustained direction.
That may be the defining feature of the weeks ahead. The euro is unlikely to collapse, but nor is it poised for a decisive recovery. Instead, it will continue to trade in the shadow of events far beyond the currency market itself. Chief among them is the price of oil, the posture of central banks and the uncertain choreography of geopolitics.
