Euro holds above 1.1400 as geopolitical risks mount

EUR/USD traded near the 1.1400 level on Wednesday, struggling to extend gains as escalating geopolitical risks triggered safe-haven flows into the US dollar and capped the euro's upside momentum.

"The flight to safety has pushed the dollar higher across the board, with EUR/USD facing resistance at 1.1450 as traders price in a higher risk premium," said Elena Fischer, geopolitical risk analyst at Edgen. "The breakdown of the US-Iran memorandum of understanding removes a key de-escalation mechanism that had supported risk appetite since June."

The euro traded at 1.1405 as of 09:00 GMT, down 0.3% from Tuesday's close, after US President Donald Trump declared at the NATO summit that the memorandum of understanding signed with Iran to end the conflict was "over," adding that he did not want to engage with Tehran further. The comments triggered a broad risk-off move across financial markets, with gold falling below $4,100 and the dollar index climbing 0.4%. The single currency had rallied to a three-month high of 1.1480 on July 3 on expectations that the European Central Bank would maintain a hawkish stance relative to the Federal Reserve.

The geopolitical shock comes at a critical juncture for EUR/USD, which had been supported by a repricing of ECB policy expectations. Markets now price a 65% probability of a 25-basis-point rate cut by the ECB in September, down from 80% a month ago, according to OIS pricing. The Federal Reserve, meanwhile, faces its own policy dilemma — the June meeting minutes, due later Wednesday, may reveal how officials assess the growth and inflation implications of a deteriorating geopolitical landscape. The last time a similar US-Iran escalation occurred in January 2020, EUR/USD fell 2.1% over two weeks as the dollar benefited from safe-haven inflows.

Rate Differentials Widen as Safe-Haven Demand Intensifies

The yield spread between 10-year US Treasuries and German Bunds widened to 178 basis points on Wednesday, up from 172 basis points at the start of the week, reflecting stronger demand for US government debt relative to European paper. The move underscores how geopolitical risk is reshaping relative value across fixed-income markets, with the dollar attracting bids not only against the euro but also against commodity-linked currencies. The New Zealand dollar fell toward 0.5700 against the greenback, while the Australian dollar reversed earlier gains after Trump's comments.

For the euro, the immediate risk is a break below the 1.1400 support level, which has held since late June. A sustained move lower could open the path toward 1.1320, the 50-day moving average, with the next major support at 1.1250 — the June 27 low. On the upside, the euro would need to reclaim 1.1480 to signal a resumption of the uptrend, a scenario that likely requires a de-escalation in geopolitical tensions or a more hawkish ECB signal at the July 24 policy meeting.

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