The euro was coming off its earlier highs at the time of writing, after it staged a decent recovery against the dollar as markets digest the sharp reversal in energy prices and a rebound in broader risk sentiment. While the move has helped stabilise the pair after recent volatility, the near-term EUR/USD outlook remains closely tied to developments in the Middle East and the direction of oil markets. That’s because the eurozone is an energy importer and therefore any sharp moves in energy prices will make a massive difference on the economy and inflation. The sudden drop in oil prices since Monday’s peak has eased immediate inflation concerns, but traders remain cautious given the fragile backdrop.
Oil and geopolitics still driving the dollar
Despite the apparent calm, the bigger question for markets is whether energy flows in the region can return to normal. The Strait of Hormuz remains the critical focal point. As one of the world’s most important oil shipping routes, any disruption to traffic through the strait would immediately reignite supply fears and likely send crude prices sharply higher again.
Until traders see clear confirmation that shipping routes are secure and production across the region is stabilising, oil prices are unlikely to retreat significantly further from current levels. That matters for currencies because elevated oil prices tend to strengthen the dollar indirectly. Higher energy costs can push inflation expectations higher and encourage safe-haven flows into the US currency when global growth risks intensify.
For now, the pullback in crude has offered some breathing space for risk assets, which in turn has allowed the EUR/USD to claw back some lost ground.
“TACO trade” makes another appearance
One narrative gaining traction again among traders is the so-called “TACO trade” — short for “Trump Always Chickens Out.” The phrase has become something of a market shorthand during the presidency of Donald Trump.
During his second term, markets have repeatedly seen a familiar pattern: strong rhetoric around tariffs or policy threats followed by a softer outcome. After initially signalling aggressive tariffs against several trading partners, Trump often scaled back those measures, ultimately settling on something far less damaging than feared.
That dynamic helped traders confidently buy the sharp equity market dip that followed the tariff announcements last April, and the same logic has guided positioning during subsequent bouts of trade-related volatility.
This time, the playbook appears to have extended beyond equities. As crude prices spiked on fears of supply disruptions in the Middle East, many traders quickly moved to fade the rally by shorting oil while simultaneously buying stocks after their steep decline.
Part of that thinking stems from the belief that the White House is acutely aware of the economic risks posed by a prolonged energy shock. Sustained high oil prices could quickly feed into inflation, undermining already fragile global growth and complicating the job of central banks.
It is precisely the sort of scenario policymakers would prefer to avoid — and that helps explain why markets reacted so sharply when signals emerged from Trump – the man that started the war – that tensions might cool.
EUR/USD outlook: Recovery faces technical hurdles
From a technical perspective, the recovery in EUR/USD still looks tentative. The pair has bounced from recent lows, but it remains below an important resistance zone around 1.1670–1.1700.
Unless that area is convincingly cleared, the rebound risks losing momentum. Short-term support is now seen around 1.1620 zone, followed by the January low of 1.1578. If we go below the latter, then a revisit of this week’s lows and 1.1500 could be on the cards.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
