EUR/USD traded almost flat above 1.1660 at the start of Thursday’s European session, after retreating from 1.1721 on Wednesday. The pullback followed reports that Tehran closed the Strait of Hormuz after Israeli attacks on Lebanon.
Iran reported breaches of a ceasefire proposal, while the US and Israel said Lebanon is not covered by the agreement. US President Donald Trump warned of action if Tehran does not comply, and both sides said they will send delegations for direct talks in Pakistan.
Fed Minutes And Dollar Reaction
Minutes from the March Federal Open Market Committee showed a more hawkish tone, supporting a US Dollar rebound. Policymakers said reaching the 2% inflation target may take longer, and some members raised the possibility of tightening for the first time since rate cuts began in August 2024.
Markets await Thursday’s US Personal Consumption Expenditures Price Index and Friday’s Consumer Prices Index for March, for clues on inflation linked to the Iran war. In Europe, German industrial production fell in February, while the trade surplus narrowed less than expected as imports and exports beat forecasts.
Technically, the pair held most gains from the prior three days, with the 4-hour RSI in bullish territory and the MACD slightly positive. Resistance sits at 1.1721 to about 1.1740, then near 1.1830, while support is at 1.1630 to 1.1640 and 1.1505.
Looking back to this time last year, we can see the market was wrestling with two major forces: the fragile Iran ceasefire and a hawkish pivot from the Fed. The uncertainty around the Strait of Hormuz kept traders on edge, creating sharp but short-lived swings in risk assets. That period of geopolitical tension taught us that volatility can be underpriced in the quiet moments right after a crisis.
Given the relative calm today, we see an opportunity in buying options to protect against future shocks. The CBOE Volatility Index (VIX) is currently hovering near 14, a significant drop from the spikes above 30 we saw during the peak of the Iran conflict in early 2025. Buying long-dated puts on equity indices or calls on oil futures could be a cheap way to hedge portfolios for the next several months.
Rates Divergence Trade Setup
The hawkish turn from the Fed, first signaled in those March 2025 minutes, did lead to two small rate hikes later that year as oil-driven inflation proved sticky. However, that inflationary impulse has since faded, with the latest Core PCE data for February 2026 coming in at a much more manageable 2.4%. This suggests the Fed’s tightening cycle is likely over, shifting the focus to when rate cuts might begin again.
This creates a clear divergence trade against the European Central Bank, which is still contending with slightly higher services inflation and has signaled no immediate plans to cut rates. We should consider using interest rate futures to bet on the spread between US and German bond yields tightening over the second half of the year. This position benefits if the Fed moves toward easing while the ECB stays put.
The EUR/USD levels from last year, particularly the 1.1740 resistance, now serve as a major support zone for the pair, which is currently trading near 1.1980. With the Fed’s hawkishness now in the rearview mirror, we see potential for the pair to test the 1.2150 level last seen in late 2024. We believe buying EUR/USD call spreads, such as a 1.2000/1.2150 spread, offers a defined-risk way to position for further upside in the coming weeks.
