Euro Squeezed by Oil Shock and Policy Risk

EUR/USD traded with a softer tone Friday morning as the macro narrative continues to be dominated by the fallout from the Iran-driven oil shock. Elevated energy prices are feeding directly into the Eurozone’s inflation outlook, reviving concerns about imported inflation at a time when growth remains fragile. For the region, the surge in oil is effectively a tax on consumption and industry, worsening the trade balance and adding another layer of pressure to an already uneven recovery.  

The ECB’s recent communication has emphasized flexibility and data dependence, suggesting a reluctance to commit to a firm rate path as it assesses whether energy-driven inflation proves persistent. With the Federal Reserve maintaining a steady stance and the U.S. outlook holding up better, EUR/USD continues to reflect a widening divergence in how the two economies are absorbing the same geopolitical shock. 

EUR/USD Daily Price History

In the above chart, EUR/USD rates are back to an important zone of confluence carved out near 1.1600 in recent months: the January 2026 swing low; and the uptrend from the August and November 2025 swing lows. However, as was the case earlier this month, the pair has been unable to clear the hurdles required to suggest a trend change has occurred. Rally attempts have been thus far rejected by the 20-day EMA (exponential moving average), a sign that bearish momentum remains intact. In a sense, the observation from two weeks ago remains true: “oil remains in the driver’s seat, so a return above 1.1600 would need to come alongside a shift in the news flow for traders to have reason to believe a bottom has been found.” 

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