A hawkish stance or guidance from the US Federal Reserve does not necessarily result in sustained US dollar strength, as the currency’s trajectory is ultimately shaped by relative monetary policy dynamics across other major developed market central banks.
The European Central Bank (ECB) has voiced concerns of stagflation risk arising from the ongoing US-Iran war that led to the closure of the Strait of Hormuz, reducing global oil and energy flows significantly.
Even though, in the ECB’s last monetary policy meeting on 19 March 2026, where it left its key policy deposit rate unchanged at 2% since June 2025, it has issued a hawkish guidance where the ECB prioritized heightened inflation risk over demand destruction that led to the Eurozone’s interest rate swaps market to price in at least two interest rate hikes by ECB before 2026 ends.
In a slew of public speeches made this week so far, key ECB officials have maintained their stances of combating inflation as a primary initiative over demand growth concerns arising from a potential prolonged global oil and energy supply shock.
ECB President Lagarde said the ECB will act decisively and swiftly if the current surge in energy costs risks a broader bout of inflation.
ECB Governing Council member Nagel added that the ECB may start to hike interest rates at its next monetary policy meeting in April if the inflation outlook continues to accelerate due to the US-Iran war.
The European Central Bank’s increasingly hawkish stance has driven a further narrowing of the 2-year yield discount differential between Eurozone sovereign bonds and US Treasuries (see Fig. 2).
The 2-year yield spread of the Eurozone sovereign bond over the US Treasury note has inched higher since its major bullish breakout in September 2025, from -1.6% to -1.26% at this time of writing.
A further narrowing of the 2-year sovereign bond yield discount between the Eurozone and the US is likely to support at least a minor recovery in the EUR/USD.
Let’s focus now on the short-term trajectory (1 to 3 days) of the EUR/USD from a technical analysis perspective.
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