EUR/USD – The Battle of Narratives in the Age of a New Energy Shock

Where We Came From — and Why It Matters

In the autumn of 2022, the euro fell below parity with the dollar for the first time in twenty years. This was not a technical quirk of the market, not a random anomaly. Behind the exchange rate stood a brutal and unforgiving formula: energy shock plus Europe’s import dependency plus eurozone recession expectations equals pressure on the euro. Gas prices soared, factories shut down, politicians lost touch with reality, and the market voted simply and cynically: Europe is vulnerable, the dollar is a refuge.

One thing needs to be understood clearly: that crisis was not an anomaly. It was an exposure. It stripped the cosmetics from the European project and revealed what had always been underneath — a continent that built a world-class economy on someone else’s energy. While energy was cheap, the model worked. When energy became a weapon, the model cracked.

Three and a half years have passed since then. EUR/USD trades around 1.17. On the surface — a reversal, a recovery, a new era. But looked at without illusions, the picture is different: the pair has not returned to strength, it has returned to repricing. These are fundamentally different things. The first means the underlying foundation has changed. The second means the market has simply revised the degree of its previous pessimism. And pessimism at parity was clearly excessive. That does not make the euro strong. It makes it less hated — which is not the same thing at all.

The New Crisis: History Repeating, With Higher Stakes

On 28 February 2026, the United States and Israel struck Iran. In retaliation, Iran blockaded the Strait of Hormuz. Through this chokepoint — just 54 kilometres wide at its narrowest — passes one fifth of the world’s seaborne oil trade and an equivalent share of global LNG. When it closed, the global energy system absorbed a blow not seen since the oil embargoes of the 1970s.

Brent pierced $120. QatarEnergy declared force majeure. Output from the Gulf’s key producers collapsed by more than 10 million barrels per day. The European gas benchmark TTF nearly doubled. All of this against the backdrop of European storage levels sitting at barely a third of capacity after a brutal winter.

The market reacted by instinct — just as it had in 2022. But here is where things get interesting: the euro did not collapse as deeply as it did then. Why? Because the ECB did not stand at the window with the expression of an institution that does not understand what is happening. The regulator immediately shifted its tone — speaking of possible rate hikes, of readiness to act “forcefully,” of not repeating the mistakes of 2022.

This is a critical shift. In 2022, the ECB was behind the curve — and the market punished the euro twice: first for Europe’s energy vulnerability, then for the regulator’s monetary cowardice. This time the regulator is trying to get ahead of events. And it is partly working: the euro is holding, even though Europe’s fundamental vulnerability has not gone anywhere.

But here lies a dangerous trap that almost nobody talks about openly.

Raising rates in the middle of an energy-driven recession is not treating the illness. It is choosing between two poisons. One poison is inflation, eroding purchasing power and political stability. The other poison is high rates amid weak growth, which crushes the corporate sector, hammers mortgages, squeezes consumption, and can ultimately turn an energy shock into a full-blown recession. The ECB is currently choosing the first poison in hopes of avoiding the second — but the market understands perfectly: if the shock drags on, the eurozone gets both poisons at once. That is called stagflation. And right now it is the primary tail risk for the euro.

An Asymmetry the Market Underestimates

There is one fact that the media discusses in passing, yet it determines everything: the United States and Europe are on opposite sides of the energy barricade.

The United States today is the world’s largest producer of oil and gas. When oil gets more expensive, American companies earn more. The US trade balance deteriorates less from rising energy prices than most developed economies, because part of that increase is monetised domestically. This does not mean the American consumer is not suffering — they are, significantly. But in structural terms, the US is an energy exporter, which means a global energy shock hits it far more softly than it hits Europe.

Europe is an importer. It always has been, and it remains one now. All the talk of green transition and energy independence is a story about a future that has not yet arrived. In the present, every $10 rise in oil and every €10 rise in TTF is a blow to industry, to logistics, to inflation, to real household incomes, and ultimately to the euro exchange rate. This is not theory. It is mechanics.

This is precisely why EUR/USD cannot rally in any genuine fundamental sense as long as the energy crisis remains unresolved. It can rally on dollar weakness. It can rally on shifting rate expectations. It can rally on diplomatic headlines. But each of these drivers is reversible. Europe’s energy dependence, for now, is not.

The market feels this. Which is exactly why the price action is so grinding. Every time euro bulls get a reason for optimism — a ceasefire, negotiations, diplomacy, an ECB signal — they push the pair higher. And every time reality reasserts itself — oil rises again, the Strait remains closed, the truce looks fragile — the move stalls. This is not a market with a trend. This is a market with an anchor.

The Dollar: Not Strong, But Irreplaceable

One of the loudest media narratives of the past year has been “the end of dollar hegemony.” It is a compelling story, easy to sell to an audience tired of American dominance. But a compelling story and market reality are different things.

The dollar has genuinely lost some of its former monopoly on strength. Trump’s attacks on Fed independence, growing deficits, political chaos, de-dollarisation rhetoric — all of this has meaningfully weighed on the American currency. Large global investors have genuinely begun asking themselves: is too large a share of our assets tied to one currency, from one country, with an unpredictable political class?

But here it is important to separate doubt from action. Doubt about the dollar is real. A systemic move away from the dollar is still a story about the future, not the present. Because when the world shakes, investors still go to the dollar. Not because they love America. But because the alternatives are not ready. The euro is the currency of a bloc without a common treasury and with a chronic internal fault line between north and south. The yuan is a currency with strict capital controls. The yen is the currency of a country with a colossal debt burden. The dollar wins not through its own strength, but through others’ weakness. And that is perhaps the most precise description of its current status.

This is exactly why the “dollar is dying” narrative always stalls in moments of real crisis. As soon as things get genuinely frightening, investors close their philosophical discussions and open long dollar positions. It is a reflex built over decades. Reflexes die slowly.

Russia, Ukraine and Geopolitical Arbitrage

In the shadow of the Iranian crisis, another process is playing out that the market is assessing with ambivalence: the Russia-Ukraine negotiations. Signals of progress supported the euro — and not by coincidence.

The logic is straightforward: any movement toward settlement in eastern Europe is a potential pathway to normalisation of energy flows, reduced military expenditure, and partial reintegration into trade chains. For the euro, this is structurally positive. The market is not waiting for a peace treaty — it is waiting for a sufficient reduction in uncertainty to reprice risk parameters.

But there is a complexity here that rarely gets stated plainly: even if some ceasefire framework emerges on Ukraine, the Hormuz crisis remains an independent variable. Both problems exist in parallel. One does not cancel the other. And a market that buys euros on Ukrainian headlines risks selling them straight back on the next escalation at the Strait. This is not a contradiction — it is the architecture of the current market reality, where there are too many geopolitical landmines to move confidently in one direction.

Market Psychology: Why This Range Is So Painful

There is one thing that charts do not show, but experienced market participants know well: prolonged range-bound markets are not neutral zones. They are zones of maximum psychological destruction.

When a market trends, everything is clear: you are either with it or against it. When a market sits in a range for months — it systematically shakes out both sides. Euro bulls buy the breakout and get the reversal. Euro bears sell the weakness and get the bounce. Nobody receives easy confirmation. Both sides accumulate losses or missed profits, lose conviction, begin doubting their own analysis.

It is precisely in moments like these that the media noise is born. Because when the market gives no answers, people search for them from commentators. Commentators compete for attention. And attention is best captured by extreme positions: “euro is heading to 1.30” or “the dollar will return to parity.” Measured, balanced analysis loses the competition for clicks. And the market receives an information environment that itself becomes a source of volatility — not because it contains truth, but because it influences behaviour.

Traders who understand this mechanism have an edge. Not because they know the direction. But because they know: in this kind of phase, the task is not to guess the trend — it is to manage uncertainty correctly.

Three Scenarios Worth Thinking About

The market does not like uncertainty — it likes scenarios. Not because they necessarily materialise, but because they structure thinking and allow you to understand in advance what any given price move actually means.

Scenario one: the Strait opens, normalisation accelerates. This is the bullish scenario for the euro. Falling oil prices remove inflationary pressure, the ECB gains room to manoeuvre, European industry exhales, and global investors return to the dollar diversification theme. In this scenario, EUR/USD has the right to move toward 1.20–1.24. The move will be slow, with corrections, but the direction is set.

Scenario two: prolonged crisis, oil above $120 for multiple quarters. This is the bearish scenario for the euro. The eurozone gets stagflation. The ECB finds itself in a trap: raising rates during weak growth carries recession risk, while not raising them means ceding inflation to the market. Industrial output falls, political pressure on the ECB builds, investors remember 2022. EUR/USD drifts back into the 1.10–1.13 range — not because Europe is on the edge again, but because disappointment is heavier than expectation.

Scenario three: fragmented reality. This is the most probable scenario for the months ahead. The Strait functions partially. Energy remains expensive but not catastrophically so. The ECB delivers one hike and pauses. The Fed holds rates. Ukraine negotiations drag on. The market lives in a state of constant repricing of news flow. EUR/USD stays within 1.14–1.20, periodically making false breakouts in both directions and shaking out those trading with conviction.

The Bottom Line

EUR/USD in 2026 is an X-ray of a world in which the old order has broken down and the new one has not yet been assembled. The dollar is no longer an unconditional quality standard — but there is no replacement for it yet. The euro is no longer the currency of a doomed project — but it has not yet become the currency of confident growth either.

Behind the exchange rate lies not a technical question. Behind it lies a philosophical one: can the European project withstand a second serious energy shock in four years? Will the ECB adapt quickly enough to avoid repeating the mistakes of the past? Will the market find a sufficiently powerful reason to rewrite the dollar-centric world picture — not at the level of narrative, but at the level of real capital reallocation?

There are no answers. But the right questions have been asked. And in a market that offers no hints, that is already something.

The 1.14–1.20 range is not dull consolidation. It is the battlefield on which a question is being decided: who will be proved right — those who believed in a new cycle of dollar weakness, or those who remember that every time the world starts to shake, Europe is always the first to feel the ground giving way beneath its feet.