War is the dollar's weapon, but peace is the euro's weapon. It's no surprise that a New York Times report that Iranian officials had offered to discuss terms for ending the fighting triggered the fastest EUR/USD rally in a month. However, Mizuho International warns that this report should be taken with a pinch of salt — similar rumours circulated almost on the first day of the strikes, and nothing decisive followed.

Dollar and Treasury reaction to truce rumours

Danske Bank argues that the rapid collapse of the EUR/USD pair is not primarily due to a change in the market's view on interest rates. Yes, derivatives have trimmed the chances of three Fed rate cuts in 2026 and pushed expectations for the restart of the easing cycle from June to July, which supported the US dollar.

But ECB deposit-rate expectations have been revised too. Where the curve previously priced in little movement in 2026, the risk of rising inflation has increased. So has the probability of a new tightening cycle — a factor that lends support to the euro. The net result should have left EUR/USD broadly unchanged, yet the currency pair has been on a roller-coaster.

Danske Bank sees the main driver as changing trade dynamics. The US is a net exporter of energy, while the eurozone is a net importer. Rising oil prices help the American economy and hurt the Old World. Meanwhile, gas, on which the eurozone is especially exposed, is surging in price.

The greenback also benefits from demand for safe-haven assets amid sharply higher geopolitical risk. But risk-off flows depend less on the oil price than on volatility. As long as uncertainty over the duration of the Middle East conflict remains high, EUR/USD has a better chance of sinking than of resurfacing.

Eurozone unemployment dynamics

Macroeconomic data is not helping the euro. The fall in unemployment to record lows was largely ignored by EUR/USD bulls. Strong labour market readings in Europe do not necessarily mean the whole economy has healed — it may simply be that many people in the Old World do not want to work.

Thus, shifting trade fundamentals and heavy demand for safe havens allow EUR/USD bears to control the market. Only talks between the US and Iran could really help the euro's cause.

Technically, on the daily chart EUR/USD is fighting resistance at 1.1640. A breakout would increase the odds of a rally toward 1.1675 and 1.1710 and could be used as a buying opportunity. A rejection, by contrast, would allow bears to add to short positions against the dollar.