EUR/USD advanced to about 1.1610 in early European trading on Monday after reports of a US–Iran deal to reopen the Strait of Hormuz improved risk sentiment and supported the euro against the dollar. Washington and Tehran announced a framework agreement, due to be signed in Switzerland on Friday, under which the US would lift its naval blockade on Iranian ports and the waterway would reopen once the deal is signed.
Attention now turns to the Federal Reserve’s policy decision on Wednesday, where the benchmark rate is expected to remain at 3.50% to 3.75%. Markets will parse the press conference for guidance on the Fed’s direction under chair Kevin Warsh, as any hawkish messaging could underpin the dollar and weigh on the pair. In the euro area, the ECB raised its key rates last week, citing inflation pressures linked to the Middle East war; it was the first increase since September 2023 after seven straight meetings on hold. ECB Governing Council member Joachim Nagel said the bank could raise rates again in July if the shock persists.
Opportunities from Risk Sentiment Shift and Options Strategies
Given the improved risk sentiment from the US-Iran deal, we should be looking at bullish positions on the EUR/USD. The reopening of the Strait of Hormuz is a significant de-escalation, reducing the US Dollar’s appeal as a safe-haven asset. Since the U.S. Energy Information Administration confirms that roughly 20% of global oil supply passes through this strait, the deal removes a major source of energy inflation fears, further supporting the Euro.
We believe the best way to express this view is through options, specifically by buying call options on the Euro with strike prices around 1.1700 and 1.1750. This strategy allows us to capitalize on the upward momentum as the pair seeks to reclaim levels seen before the recent Middle East conflict. Historical data from 2025 shows the pair traded consistently above 1.1800, suggesting there is significant room for recovery in the coming weeks.
Volatility Trends and Key Event Risks
This geopolitical de-escalation also means we should expect market volatility to decrease. The VIX index, a key gauge of market fear, has already dropped nearly 15% in the past two days, and we anticipate this trend will continue. We see an opportunity to sell volatility through strategies like short straddles, particularly in oil and energy-related equities that were heavily impacted by the risk premium.
The primary risk to this outlook is the Federal Reserve meeting this Wednesday. While the ECB has turned hawkish with its first rate hike since September 2023, the Fed is expected to hold rates steady. However, any surprisingly aggressive comments from the new Fed Chair could cause a short-term spike in the Dollar, so we must manage our positions carefully around that event.
