Oil sets the broader trend, but central bank monetary policy dictates the amplitude of the currency pair’s moves. Brent crude’s rally above the $100/barrel mark, triggered by the Houthis opening a “second front” in the Red Sea, has pushed 10-year U.S. Treasury yields to their highest levels since early 2025. Currently, the futures market prices the probability of a Fed rate hike in July at 1 in 3 (roughly 33%). The U.S. regulator could well deliver a surprise as early as next week, which would serve as a powerful catalyst for dollar strength.
The ECB Failed to Act as a Lifeline for the Euro
The European Central Bank was unable to provide support for the single currency. Christine Lagarde tried to smooth things over, noting that some Governing Council members were ready to hike rates immediately. However, the final decision was entirely predictable: policy tightening was postponed until at least September to allow the central bank to assess developments in the Middle East. Notably, the euro began to slide even before the press conference began, classically executing the “buy the rumor, sell the fact” playbook against the backdrop of the oil rally.
The U.S. Dilemma: Inflation vs. Politics
Washington currently has no winning scenarios. Diplomacy with an adversary that only understands force is stalling. The White House has already tried twice to freeze the conflict (a ceasefire agreement in April and a deal with Iran in June), but the fragile peace quickly collapsed. Rising oil prices pose a direct threat to the U.S. economy by accelerating inflation. This creates severe political risks for Republicans in the upcoming midterm elections and increases the likelihood that the Fed will opt for aggressive policy tightening at any moment to bring prices down.
Why the Fed Might Change Its Tune
On one hand, a rate hike amid slowing June inflation would seem illogical (especially since inflation was higher in May, yet the Fed held steady). However, if Brent crude surges toward $120 or even $150 by the next meeting in September, inaction in July will be viewed as a glaring political misstep. It is precisely this kind of shortsightedness that Kevin Warsh previously used to harshly criticize the former Fed leadership.
What Could Save the Euro?
The rising probability of a hawkish pivot by the Fed increases the risk of an EUR/USD plunge. The only lifeline for the euro would be a sudden de-escalation in the Middle East. Given that past oil spikes above $100 have often occurred “out of nowhere,” the probability of such a positive scenario cannot be entirely ruled out.
Trading Takeaway
The euro’s inability to hold within the current consolidation range of $1.137–$1.147 will serve as a direct signal to sell. The nearest downside targets are the $1.127 and $1.120 levels. Conversely, if the price unsuccessfully tests the $1.137 support and quickly bounces back, the pair will likely continue its range-bound trading.
