EUR/USD holds above 1.1360 as Hormuz risks ease, dollar rally stalls

The euro held above $1.1360 on Thursday as the dollar snapped a three-session winning streak, with easing geopolitical risks from the Strait of Hormuz and softer US inflation data tempering expectations for Federal Reserve rate hikes this year.

"The correction in crude oil prices and the gradual easing of both shipping-related costs and gas supplies provide timely relief to currency markets," said Somasekhar Vemuri, senior director at Crisil Ratings. "However, the geopolitical situation in West Asia remains fluid and escalation risks persist."

The dollar index fell 0.18% to 101.43, retreating from a 13-month peak touched Wednesday, as the euro rose 0.08% to $1.1366. The greenback had rallied over the prior six sessions as markets priced in a growing chance of Fed tightening, but Thursday's data flow shifted the calculus. The personal consumption expenditures price index surged 4.1% in the 12 months through May — the largest annual increase since April 2023 — though it matched expectations. On a monthly basis, the PCE index rose 0.4%, just below the 0.5% estimate. Consumer spending remained resilient, climbing 0.7% in May, above the 0.6% forecast and accelerating from 0.4% in April.

The repricing matters because the dollar's recent strength had pushed gold briefly below $4,000 an ounce for the first time in more than seven months and sent bitcoin under $60,000. Markets now price a roughly 30% probability of a 25-basis-point hike at the Fed's July meeting, down from 34.2% a day earlier, while September expectations dipped to 62.1% from 65.7%, according to CME FedWatch. The last time the dollar index traded at these levels was in May 2025, preceding a period of sustained euro weakness as rate differentials widened in favor of the US.

Hormuz détente reshapes risk calculus

The easing of tensions in the Strait of Hormuz has been the dominant force behind the shift in currency markets. Brent crude has fallen 42% from its April peak of $126 a barrel to below $73, erasing the geopolitical risk premium built up during the Iran conflict. The reopening of the critical waterway — which handles about 21% of global oil trade — followed a US-Iran memorandum of understanding that allowed tanker traffic to resume.

The impact has cascaded through currency pairs. The British pound strengthened 0.23% to $1.3194, snapping consecutive declines after the resignation of Prime Minister Keir Starmer on Monday. Against the yen, the dollar edged up 0.01% to 161.79, with traders watching for intervention as the pair approaches 161.96 — a level that would leave the yen at its weakest since 1986. Bank of Japan board member Naoki Tamura reiterated the case for gradual rate hikes, while the government's draft economic blueprint signaled a preference for keeping borrowing costs low, setting up potential policy tensions.

Bearish setup persists for euro

Despite the near-term relief, technical indicators suggest the euro's upside remains capped. The dollar's rally had been fueled by expectations that sticky inflation would force the Fed to resume tightening, and Thursday's data did little to fully dispel that view. The GDP revision to 2.1% annualized in the first quarter from the previously reported 1.6% pace underscored the economy's resilience, while weekly jobless claims fell by 12,000 to 215,000, below the 225,000 forecast.

"The worst of inflation and consumer angst may be mostly behind us," said Brian Jacobsen, chief economist at Annex Wealth Management. "Inflation expectations are tied more to the price at the pump than the price of microchips and memory. As long as gasoline prices trend lower, inflation expectations will likely follow suit."

For the euro, the path forward hinges on whether the Hormuz détente holds and whether the Fed's next move is a hike or a prolonged pause. If geopolitical risks continue to recede and oil prices stabilize, the dollar could face further headwinds, giving the euro room to test resistance above $1.1400. Conversely, any renewed escalation in West Asia would likely drive safe-haven demand back into the greenback, pressuring the single currency toward $1.1250 support.

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