EUR/USD concluded Friday at 1.1817, reflecting a modest increase of 0.13% for the session, yet remaining largely unchanged for the week — confined within a narrow range of 1.1743 to 1.1820, which concealed the turbulent dynamics at play beneath the surface. Then Saturday arrived and the entire dynamic shifted. The United States and Israel initiated synchronized military operations targeting Iran, prompting Tehran to officially announce the closure of the Strait of Hormuz as its main response. Consequently, every oil-importing economy worldwide — with the eurozone being particularly affected — is bracing for a Monday morning repricing that may lead to a significant drop in EUR/USD before European markets even complete their initial coffee break. The pair begins March with an increase of 8.55% over the last twelve months, yet it has decreased by 1.33% in the past month. It currently stands at a critical juncture where a geopolitical energy shock could either propel the long-term euro recovery or completely derail it, contingent on the speed of oil price movements and the duration of the Hormuz disruption. The Strait of Hormuz is responsible for the transit of around 20% of the world’s crude oil and a notable portion of liquefied natural gas on a daily basis. Tehran’s decision to close it is not merely a symbolic gesture; it represents the most significant supply disruption since the 1973 OPEC embargo, based on any assessment of the volume at risk. Brent crude hovered near $73 per barrel on Friday; Capital Economics’ William Jackson cautioned that ongoing disruptions might elevate Brent to $100, while Mizuho’s Vishnu Varathan highlighted a possible 10–25% increase in oil prices should the conflict escalate.
The eurozone stands as a significant net importer of oil. In contrast to the United States, which has reached a state of near energy self-sufficiency via shale production, Europe relies on imported crude for about 90% of its petroleum requirements. A shift from $73 to $100 Brent — a 37% increase — impacts Europe’s trade balance, fiscal position, and corporate margins more severely than it does the American economy. The rise in energy costs is expanding the trade deficit within the eurozone, intensifying inflationary pressures on the European Central Bank, and simultaneously constraining consumer purchasing power across Germany, France, Italy, and Spain. Each $10 increase in Brent results in an estimated €15–20 billion per year added to Europe’s net energy import expenses, funds that exit the region and benefit Gulf and Russian producers. For EUR/USD, the oil transmission operates in a mechanical manner. Elevated oil prices exert downward pressure on the euro against the dollar via three mechanisms: worsening terms of trade (as Europe relies on dollar-denominated energy imports), increasing inflation that limits the ECB’s capacity for further easing, and capital outflows resulting from energy payments depleting eurozone reserves. The dollar, in this context, gains from safe-haven demand and energy self-sufficiency — a pairing that has historically led to a stronger dollar amid Gulf conflicts. The initial impact suggests a decline in EUR/USD at Monday’s opening, with the potential to gap towards the 1.1700–1.1750 range before the pair stabilizes.
The German headline CPI decreased from 2.1% in January to 1.9% in February, with the monthly figure registering at only +0.2%, falling short of the anticipated +0.5%. The undershoot was significant enough to adjust expectations for Tuesday’s eurozone-wide CPI release, which is now anticipated to come in below consensus. German inflation falling below 2.0% — the ECB’s target — signifies a key development that typically bolsters the argument for additional rate cuts and reinforces the perspective that the ECB is nearing the conclusion of its tightening phase compared to the Federal Reserve. However, the strikes in Iran significantly complicate the narrative. A $100 Brent would influence European energy prices within weeks, driving headline CPI back above 2.0% and possibly exceeding 2.5% if the disruption continues into Q2. The ECB is likely to encounter a similar challenging situation as the Fed: reduce rates to bolster growth in a faltering economy, or maintain rates to combat the resurgence of energy-driven inflation. BNY highlighted in recent research that the ECB’s communication has emphasized it is “not pre-committing to a rate path” — phrasing that maintains optimal flexibility while also indicating the central bank recognizes the inflation battle may still be ongoing despite the improvement in German CPI. The eurozone CPI release on Tuesday morning at 10:00 serves as the initial significant indicator of whether the weakness observed in Germany is prevalent throughout the entire bloc. If the headline eurozone CPI comes in below 2.0%, the market may briefly shift towards expectations of ECB easing — however, this shift will directly contend with the inflation concerns driven by the oil situation stemming from the Iran crisis. The outcome is expected to yield a subdued response to the CPI data, as the Iran-oil situation is anticipated to overshadow the EUR/USD movements during the initial part of the week.
The disparity in inflation rates between the United States and Europe serves as the fundamental factor influencing EUR/USD’s price movements, and this gap significantly increased following the release of Friday’s PPI data. The U.S. Producer Price Index increased from 0.4% to 0.5% month-over-month in January, resulting in an annual rate rise from 3.3% to 3.6%. Core PPI experienced a significant increase, rising from 0.6% to 0.8% on a monthly basis — nearly three times the anticipated 0.3% consensus — whereas the annual core rate saw a slight decline from 3.0% to 2.9%. The headline figures indicate a distinct trend: U.S. producer-level inflation is elevated, and the underlying pressures imply that consumer inflation is likely to persist throughout Q1 and Q2. The current level of the Fed funds rate is 4.75%. CME FedWatch indicates roughly 42% probability of a rate cut in June and a total easing of 50 basis points by the end of the year. However, with core PPI at 3.6%, implementing a cut in June presents significant political and economic challenges, unless there is a swift decline in the labor market. The 10-year Treasury yield stands at 3.961%, which is 80 basis points lower than the Fed funds rate. This indicates the bond market’s view that economic growth is decelerating more rapidly than inflation, creating a stagflationary environment that constrains the Federal Reserve’s ability to act in either direction.
Meanwhile, the German CPI at 1.9% and on a downward trend indicates that the ECB has additional capacity to implement easing measures. The ECB has implemented a reduction in its deposit rate and indicated a strategy that relies on data, assessing conditions on a meeting-by-meeting basis. Should eurozone inflation remain under 2.0% and the economy deteriorate further due to the Iran oil shock, the ECB may consider another rate cut. This action would increase the rate differential with the Fed, exerting downward pressure on EUR/USD. The rate spread stands as the primary influence on EUR/USD for 3–6 month periods. The existing conditions — with the Fed held at 4.75% due to inflation and the ECB positioned to ease below 3.0% — suggest a stronger dollar and a weaker euro from a fundamental perspective. Nordea captured the overall trend effectively: EUR/USD has remained mostly stable as markets process a transformation in the U.S. tariff landscape, and the market movements have been rather unremarkable. However, that lateral consolidation took place prior to Iran. The geopolitical shock presents a directional catalyst that tariff uncertainty alone could not deliver — and this catalyst supports the dollar through the energy, inflation, and safe-haven channels concurrently.