Euro Falls to 1.1425 as Middle East Tensions Spike Oil Prices—July 8

The euro fell to 1.1425 against the US dollar on July 8 as Iran’s attack on commercial shipping in the Strait of Hormuz shattered a month-old ceasefire. Oil prices surged to a two-week high of $76.50 per barrel, triggering a broad flight to safety. The escalation has complicated the inflation outlook for both the eurozone and US, raising questions about when central banks will cut rates.

How the ceasefire collapsed in hours

On July 7, Iran attacked three commercial vessels transiting the Strait of Hormuz, including an LNG tanker. The US responded with large-scale strikes on more than 80 Iranian targets and reinstated sanctions on Iranian oil exports. Iran then launched counterattacks on sites in Bahrain and Kuwait. President Trump declared the ceasefire officially over during the NATO summit in Ankara, calling Iranian leadership “scum” and “liars” and ruling out near-term diplomacy.

Why the dollar surged while the euro weakened

Risk aversion swept currency markets as investors fled emerging-market currencies toward the US dollar. The euro and sterling both lost ground to the dollar, with EUR/USD trading at 1.1425 and GBP/USD at 1.3365 by morning on July 8, though both recovered slightly from overnight lows. Smaller emerging-market currencies suffered the biggest losses. The geopolitical risk premium has returned to the FX market, draining capital from most currencies.

Three forces now shaping EUR/USD direction

The FOMC meeting minutes released on July 8 provided clues on future Fed rate cuts, a key driver for the pair. The ECB continues to signal readiness for a final 25 basis point rate hike in September, though energy shocks have dimmed rate hike expectations. Oil price volatility now complicates the inflation outlook on both sides of the Atlantic, adding uncertainty to central bank decisions.

MUFG sees recovery potential if energy shock eases

Despite the weakness, analysts at MUFG expect EUR/USD to recover toward 1.1800, the top of its year-long 1.1400-1.1800 range. Business confidence rose to 50.0 in June from a May low of 48.5, and industrial production data from France and Spain beat expectations. Eurozone Q2 GDP growth forecasts were upgraded to 0.25% from near-stagnation, suggesting the worst of the growth hit may be passing. A faster unwind of the energy shock combined with the September ECB rate hike could support euro strength in coming weeks.

Final Thoughts

EUR/USD is caught between geopolitical risk, oil volatility, and diverging central bank paths. If the Middle East tensions ease and eurozone growth proves resilient, the euro has room to recover toward 1.1800. Watch the FOMC minutes and ECB signals closely.

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