Negotiations have failed, and the Strait of Hormuz is blocked. The US and Iran are accusing each other of hijacking tankers. And the euro is not going to drop below 1.17. Since the start of the armed conflict in Ukraine, the regional currency has performed better than its G10 peers, except for the Norwegian krone, the currency of an oil-exporting country. Paradox? When emotions and the fear of missing out rule the markets, this happens. However, illusions will be lost sooner or later.

The Reaction of G10 Currencies to the Conflict in the Middle East

ANZ Research believes that the EUR/USD rally has gone too far. Given the euro's heightened sensitivity to oil prices, as reflected in trade conditions, the regional currency's exchange rate against the US dollar is significantly overvalued. For advancement above 1.185, a serious de-escalation of the conflict in the Middle East is required. There is none in sight.

Iran did not attend the negotiations in Islamabad and is attacking tankers passing through the Strait of Hormuz. Tehran claims it will continue to do so until the US lifts the blockade of the planet's main oil artery. Donald Trump has, as usual, retreated. He threatened to destroy every power plant and every bridge if a deal is not reached. Instead, the ceasefire regime was indefinitely extended.

Such concessions may be perceived worldwide as an act of goodwill; however, in the Middle East, they are seen as a sign of weakness. Iran will continue to adhere to aggressive rhetoric. The timelines for de-escalation of the geopolitical conflict are uncertain. Oil volatility has soared. Very soon, prices will follow suit.

Dynamics of Oil Volatility

Excessively high Brent and WTI quotes are a real disaster for the global economy. The first to feel the impact will be oil and gas-dependent Europe. It is not surprising that the German Ministry of Economy has halved its 2026 GDP forecast from 1% to 0.5%. The estimate for 2027 has also been reduced – from 1.3% to 0.9%. The recovery of the German economy is delayed, but the euro remains stable.

The stabilization of EUR/USD quotes is driven by retail investors' intention to buy dips in the S&P 500. They are trading with an upward momentum, and under such conditions, news, whether good or bad, is ignored. At the same time, the improvement in global risk appetite is perceived as a green light for the euro.

Markets surprise from time to time. But sooner or later, everything returns to its course. It is obvious that the US does not want to continue the war. But if they have to do so, the favorites, as at the beginning of March, will be oil and the US dollar.

Technically, on the daily chart, EUR/USD is forming an inside bar. A break of its lower boundary near the 1.1720 mark will allow for an increase in short positions on the euro against the US dollar opened from 1.1760. At the same time, a new local low at 1.1750 will increase the risks of a decline to 1.1640 and 1.1615.