Euro slides toward 1.1600 as Iran tensions fuel dollar demand

Escalating hostilities in the Middle East pushed the euro to within striking distance of 1.1600 on Wednesday, as investors fled to the safety of the dollar and crude oil surged.

Renewed US-Iran hostilities drove the euro to test 1.1600 on Wednesday, with the dollar index climbing toward 98.78 as crude oil's rally compounded the single currency's woes.

"The combination of a direct military escalation and rising energy costs is a worst-case scenario for the eurozone, which imports most of its oil," said Elena Fischer, geopolitical risk analyst at Edgen. "Markets are pricing in a prolonged period of uncertainty."

EUR/USD traded at 1.1615 in European afternoon hours, hovering just above the 1.1600 level that capped downside attempts on Monday. The 4-hour Relative Strength Index lingered below 50 while the MACD showed growing bearish pressure, according to FXStreet data. The US Dollar Index knocked on 98.78, a critical confluence zone where a horizontal resistance line and a descending trendline intersect. Crude oil extended gains as reports emerged of US attacks on Iran and Iranian missile and drone strikes on Kuwait and Bahrain, testing the limits of a fragile ceasefire. Al Jazeera also reported an Israeli attack on the outskirts of Beirut, adding further fuel to the regional fire.

A sustained break below 1.1600 would open the door to 1.1570 — the May 21 low — and potentially 1.1505, April's bottom. For the eurozone, higher energy costs compound an already fragile economic picture: the composite PMI slipped to 48.6 in April, well below the 50.1 forecast, as services activity buckled under rising input prices and weakening demand tied to the Middle East conflict.

Oil's asymmetric toll on the eurozone

The Strait of Hormuz handles about 21 percent of global oil trade, and any disruption there disproportionately impacts Europe. The eurozone is a net energy importer, meaning every dollar rise in crude prices widens its trade deficit and adds to inflationary pressure at a time when the European Central Bank is weighing its next rate move. Economists polled by Reuters expect the ECB to hike in June as stagflation risk stays high, a policy dilemma that contrasts with the Federal Reserve's more straightforward inflation fight.

The dollar, by contrast, benefits from both safe-haven flows and the relative energy independence of the US, which has become a net exporter of crude. The DXY's bounce from 97.60 has stalled at the 98.78 resistance zone, with the RSI flatlining near 60 — a sign buyers are losing momentum just as they approach a critical technical barrier. A rejection at 98.90 could send the index back toward 98.35 and 97.98, while a clean breakout above the descending trendline would target 99.50.

Sterling holds up better

The pound has fared relatively well, with GBP/USD trading near 1.3477. The UK composite PMI rose to 52.0 in April, driven by a manufacturing rebound to 53.6, though record-high input costs from supply chain disruptions are eating into margins. The pair is struggling to stay above its rising trendline support, and the RSI heading toward 40 suggests bullish momentum is fading. A sustained move below 1.3460 could accelerate losses to 1.3380.

What comes next

The last time US-Iran tensions escalated to this degree — during the January 2020 Qasem Soleimani strike — the dollar index gained 1.2 percent over the following two weeks while EUR/USD fell to 1.1060 from 1.1170. The current situation involves a broader geographic scope, with strikes hitting Kuwait and Bahrain, suggesting the risk premium may need to expand further. Markets will watch for any diplomatic off-ramp, but for now the path of least resistance points to continued dollar strength and euro weakness.

This article is for informational purposes only and does not constitute investment advice.