Euro steadies after sharp weekly gain
The euro traded around 1.1785 against the U.S. dollar on Wednesday, consolidating near the 1.1800 area after a roughly 2.5% rise over the past week. The single currency’s advance reflects reduced dollar demand as markets price in a higher chance of renewed peace talks between Washington and Tehran.
Technical signals show the euro pausing just below resistance at 1.1825, last seen in late February. A sustained break above this level could pave the way toward 1.1930, while immediate support is seen near 1.1780, followed by 1.1720 and 1.1650. Traders are watching whether the pair can hold above the 1.1780 area amid headline-driven swings.
Diplomatic prospects pressure the dollar
U.S. President Donald Trump said in an interview that discussions with Iran could resume in Islamabad within two days. Although Iranian officials have not commented publicly, U.N. Secretary-General António Guterres said renewed dialogue this week is “highly probable.”
The possibility of talks has weakened demand for the dollar’s traditional safe-haven role. A shift toward de-escalation in the Middle East was visible in commodities, with West Texas Intermediate crude retreating to about $92.48 per barrel on Tuesday after a sharp rally the previous session. A lasting easing of tensions would remove a key support for the greenback that emerged as the conflict intensified.
Still, the outlook remains fragile. A confirmed return to the negotiating table in Islamabad could deepen the dollar’s pullback and reinforce the euro’s recent gains. Failure to launch talks, or a clear rejection from Tehran, would likely trigger renewed risk aversion and a swing back toward dollar-denominated assets.
Strait of Hormuz blockade raises stakes
The U.S. military confirmed that the blockade across the Strait of Hormuz is fully in effect, cutting off about 90% of Iran’s sea trade. The move increases economic pressure on Tehran to engage in talks and has disrupted global oil flows, keeping energy markets sensitive to any diplomatic signals.
While the blockade supports elevated energy prices, the emerging prospect of negotiations has created a tug of war in the oil market between supply risks and hopes of reduced geopolitical tension. This dynamic is feeding directly into inflation readings on both sides of the Atlantic.
Euro area inflation climbs as energy costs rise
Europe’s inflation data show renewed upward pressure, driven in part by the conflict’s impact on energy. The euro area’s annual inflation rate rose to 2.5% in March, supported by a 4.9% year-on-year jump in energy costs, the first annual energy increase in nearly a year.
National data are tracking this broader trend. France’s March Consumer Price Index rose 2% on the year, up from 1.9% in February, in line with earlier German and Spanish figures released this week.
European Central Bank President Christine Lagarde said the ECB is closely monitoring developments as the euro area edges nearer to its adverse scenario. She reiterated that future rate decisions will remain dependent on incoming data, with the latest inflation figures likely to reinforce a cautious stance.
U.S. price data show mixed picture
In the United States, inflation signals are more nuanced. Producer prices rose 4% year-on-year in March, up from 3.4% in February but below forecasts for 4.6%. Excluding food and energy, core producer prices increased 3.8%, under expectations for a 4.2% rise.
The latest reading of the core Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation gauge, showed annual inflation moderating to 2.97% in February. This contrasts with the euro area’s recent uptick and highlights a potential divergence in inflation trajectories between the two economies.
Monetary policy divergence back in focus
With geopolitical risk premium on the dollar potentially fading, attention is shifting back to relative economic performance and central bank policy paths. The combination of firmer inflation in the euro area and somewhat softer core inflation in the United States could make monetary policy divergence a more important driver of exchange rates.
If the ECB is forced to lean more hawkish due to persistent energy-led price pressures while the Federal Reserve gains confidence in disinflation, the euro could find additional support beyond the current geopolitical narrative. Conversely, any renewed inflation surprise in the United States or a sharp slowdown in Europe would shift that balance.
Euro area industrial output weak but largely shrugged off
Hard economic data from Europe remain soft. Eurostat reported earlier that euro area industrial production fell 1.5% month-on-month in January, a steeper decline than expected and a reversal from the previous month. The figure, however, is viewed as outdated in the context of newer forward-looking indicators and the more immediate impact of Middle East developments.
February industrial output data, due later in the day, are forecast to show a modest 0.3% rebound after the January drop. Expectations for the release are muted, as the data precede the latest escalation around the Strait of Hormuz and are unlikely to alter the broader narrative.
Market outlook: levels to watch on the euro
For now, the focus remains squarely on the prospect and timing of renewed U.S.–Iran talks. Traders are watching three key technical areas on EUR/USD:
- Immediate resistance: 1.1825. A clear break and consolidation above this zone could signal a stronger risk-on shift and open a move toward 1.1930.
- First support: 1.1780. Holding above this level would suggest that confidence in diplomacy and policy divergence is still underpinning the euro.
- Deeper supports: 1.1720 and 1.1650. A retreat toward these areas would indicate rising caution as the market demands concrete diplomatic action rather than expectations alone.
The trading tone in the days ahead will hinge on whether diplomatic momentum materializes into formal negotiations, and on how new data refine views of ECB and Federal Reserve policy paths.
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