EUR/USD trades under pressure on Thursday as ongoing Middle East tensions keep the US Dollar (USD) broadly supported, weighing on the Euro(EUR).

• EUR/USD trades under pressure as Middle East tensions keep USD broadly supported.
• Oil-driven inflation pressures prompt traders to price in tighter monetary policy.
• Traders price in ECB rate hikes while expecting the Fed to hold rates steady.

At the time of writing, EUR/USD is trading around 1.1537, after hitting a low of 1.1509. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 100, below a daily high of 100.26.

Investors remain caught between shifting escalation and de-escalation headlines around the US-Iran conflict, keeping volatility elevated across FX markets. Earlier optimism that the conflict could end soon faded after US President Donald Trump poured cold water on de-escalation hopes in his address to the nation, signaling that military operations will continue and offering no clear timeline for a resolution.

Following Trump’s remarks, Oil prices resumed their upside amid concerns over supply disruptions through the Strait of Hormuz, while the US Dollar recovered from a one-week low on safe-haven demand.

Rising Oil prices are prompting traders to reassess the monetary policy path of major central banks, as higher energy costs add to inflation pressures while also raising risks to economic growth.

This combination could force central banks to maintain a tighter policy stance. Traders are pricing in two to three rate hikes from the European Central Bank (ECB) by year-end, while markets widely expect the Federal Reserve (Fed) to hold rates steady through 2026.

The Eurozone remains more vulnerable to an energy shock than the United States due to its heavy reliance on imported energy, while the US, as a net exporter, is relatively better insulated from rising Oil prices.

However, inflation in the Eurozone is closer to the ECB's 2% target, whereas price pressure in the United States remains relatively elevated, keeping the Fed on a more cautious path.

ECB policymaker François Villeroy de Galhau said on Thursday that the next move in key interest rates is “highly likely to be upwards.” He noted that “market inflation expectations have risen sharply” and added that “as of today, we are closer to the ECB’s adverse intermediate scenario than to the baseline scenario.”

Attention now turns to the US Nonfarm Payrolls (NFP) report due on Friday, which could provide fresh cues on the Fed’s monetary policy outlook and drive near-term direction in EUR/USD.