The Euro pared some losses against the US Dollar on Tuesday as the Dollar lost momentum ahead of the Federal Reserve decision due on Wednesday. EUR/USD traded near 1.1707 after an intraday low of 1.1677.
The US Dollar Index (DXY) traded around 98.66 after a daily high of 98.88 and was up nearly 0.18% on the day. Support for the Dollar remained from US-Iran tensions and firm US Treasury yields.
Federal Reserve Outlook
The Fed is expected to keep rates unchanged in the 3.50%–3.75% range. Markets are focused on guidance, with higher Oil prices lifting inflation expectations and shifting pricing towards higher-for-longer rates rather than two cuts.
In the Eurozone, markets are pricing at least two European Central Bank rate hikes, while the ECB is expected to hold rates at 2.00% on Thursday. Policymakers are weighing inflation pressure against growth risks linked to reliance on imported energy.
The ECB Bank Lending Survey for Q1 2026 showed rising inflation expectations across horizons. One-year expectations rose to 4.0% in March from 2.5% in February, three-year increased to 3.0% from 2.5%, and five-year edged up to 2.4% from 2.3%.
Efforts to end the US-Iran war were reported to have stalled, with disruption continuing in the Strait of Hormuz and Oil supply remaining tight. Iran is expected to submit a revised peace proposal in coming days, according to CNN.
Strategy And Risk Positioning
We are facing a critical week with both the Federal Reserve and the European Central Bank meetings on the horizon. The primary focus is how policymakers will address persistent inflation, largely fueled by the ongoing US-Iran conflict and its impact on oil prices. This sets the stage for significant volatility in currency and interest rate markets.
Given the Fed is likely to signal a “higher-for-longer” stance, we should anticipate continued strength in the US Dollar. With US 10-year Treasury yields already firming around 4.5%, options strategies that favor a stronger dollar against currencies with more fragile economies could be prudent. Derivative traders might also consider positioning for a hawkish surprise through Fed Funds futures, betting that the central bank’s forward guidance will be more aggressive than currently priced.
For the Euro, the situation is more complex as the ECB balances inflation against significant economic growth risks from high energy prices. While we are pricing in two rate hikes this year, this looks similar to the situation back in 2022 and 2023 when the ECB was forced to tighten into a weakening economy. Therefore, any rally in the EUR/USD pair above 1.1800 could be a selling opportunity, using put options to speculate on a pullback toward the 1.1500 range.
The US-Iran conflict remains the core driver of market sentiment, keeping the Strait of Hormuz under threat and oil supply tight. With Brent crude futures already hovering near $110 a barrel, buying call options to protect against further supply-shock-driven spikes seems like a sensible strategy. Any news of failed peace talks will likely add to volatility, reinforcing the need for hedges across asset classes, including equity index puts.
