Euro Rises Against Dollar Despite Strong US Labor Market Data
The EUR/USD pair rose to 1.1775, gaining 0.44% on the day, as geopolitical risks around the Strait of Hormuz outweighed the positive nonfarm payrolls (NFP) report. US employment increased by 115,000 in April, significantly exceeding forecasts, but the dollar remained under pressure due to risk aversion.
Analytical Note
May 10, 2026
Confidential
The Gist: What's Really Happening
The rise of EUR/USD to 1.1775 despite strong US labor market data is not a local anomaly but a moment of structural reassessment of the dollar's role as a safe-haven asset. NFP showed 115,000 new jobs in April against a forecast of 65,000, with unemployment remaining at a historically low 4.3%. By all currency trading standards, the dollar should have strengthened, but instead it lost ground to the euro. Because simultaneously with the macro data release, traders were receiving reports from the Persian Gulf: clashes between the US and Iran called into question the fragile ceasefire.
The market is now trading not on interest rate differentials but on a geopolitical risk premium, and this premium works against the dollar. Paradoxical but explainable: the conflict is occurring in a region that directly impacts US gasoline prices and, consequently, consumer sentiment within the US. The dollar remains the world's reserve currency, but its safe-haven premium is shrinking because the source of instability hits the US economy harder than the European one.
The second layer of analysis: the European Central Bank and the Federal Reserve react differently to oil shocks. A Commerzbank study published by Volkmar Baur on May 7-8 shows that market expectations for the ECB rate are significantly more sensitive to changes in oil prices than expectations for the Fed rate. Moreover, inflation expectations in the eurozone react even more sharply to oil. When the barrel price falls (as happens during de-escalation), the ECB cuts rates more aggressively than the Fed, but eurozone inflation expectations fall even more, and the real rate differential works in favor of the euro. This mechanism is pushing EUR/USD higher, and it started working long before any actual peace agreement—the market prices it in preemptively.
Timeline and Context
The EUR/USD pair entered a turbulence zone with the onset of the Iran conflict on February 28, 2026. Before the conflict, the pair fluctuated around 1.18. At the peak of the crisis, when Brent rose to $110 per barrel, EUR/USD briefly touched 1.14. Then a rebound began, accelerated by three factors.
The first factor—strengthened confidence in European institutions. The weekend of April 11-12 was a turning point: Viktor Orbán's defeat in the Hungarian elections restored market faith in the EU's ability to implement reforms, causing a structural shift in EUR/USD of about 2 cents upward. The second factor—the ceasefire between the US and Iran mediated by Pakistan, announced on April 7, which began to reduce the oil premium. The third factor—a weakening dollar. The DXY index fell below 98, completely losing all the gains made during the escalation of the conflict.
By May 8, Brent had corrected from $110 to around $101, EUR/USD recovered to 1.175, and subsequent events—clashes in the Strait of Hormuz—only confirmed the fragility of the ceasefire, adding volatility but not changing the direction.
Who Wins and Who Loses
Winners:
- European energy importers. Every cent of euro appreciation against the dollar reduces the cost of USD-denominated oil and gas contracts. For a country like Germany, importing about 1.8 million barrels per day, a 2-cent exchange rate change saves roughly $3.6 million daily.
- Eurozone tourism sector. A strong euro makes travel to Europe more expensive for Americans, reducing tourist flow, but simultaneously Europeans gain greater purchasing power abroad—this supports airlines and tour operators.
- Companies hedging currency risks. Traders who timely opened long positions on the euro in anticipation of de-escalation locked in profits of about 2-3% over several weeks.
Losers:
- American exporters. A strong euro means more expensive American goods for European buyers. For an agricultural machinery manufacturer from Illinois with a European contract worth $200 million, each cent of euro appreciation translates to an additional $2 million price advantage for EU competitors.
- Investors in US Treasury bonds. Dollar weakening reduces the attractiveness of UST for foreign holders, which could push yields higher. Peter Schiff warned on May 1: "The glory days of the dollar are over"—its muted rally in response to the military conflict showed that its safe-haven status is undermined.
- The Federal Reserve. Strong NFP data should have given the FOMC leeway to maintain a hawkish stance on inflation, but geopolitics seizes the initiative. The market is watching the Strait of Hormuz more than payrolls, and the Fed is losing control of the narrative.
What the Media Isn't Saying
The first non-obvious insight concerns the nature of the dollar's safe-haven premium. Traditionally, during global instability, capital flows into USD. But in 2026, this mechanism is faltering. DXY briefly rose above 100 in early March, then fell below 98—all the "war gains" evaporated. The reason: the conflict is in the Middle East, not somewhere far away. It directly hits US gasoline prices, which have risen by more than $1.50 per gallon since the conflict began and are approaching $5.00. The dollar remains the world's reserve currency, liquidity is still concentrated in US assets, but when the source of instability affects the US domestic consumer more than the eurozone consumer, the safe-haven bid dissipates.
The second point: no one is discussing the role of the Hungarian elections. Commerzbank analyzed the 10-week dynamics of EUR/USD and found that since April 13, the pair diverged from the 10-year government bond yield differential, and a parallel shift in favor of the euro of about 2 cents occurred precisely on the weekend of April 11-12—when Orbán was defeated. This means that the European political landscape has become an independent factor in the currency market, something not seen since the debt crisis of 2011-2012. The market has begun to price in a "EU reformability premium" into the euro exchange rate—this is a new phenomenon that could persist for a long time.
Third: the real rate mechanism does not work as textbooks describe. Commerzbank showed that when oil prices fall (de-escalation), nominal rates in the eurozone decline more than in the US, but eurozone inflation expectations fall even more—and it is this delta of real rates that works in favor of the euro. For a trader, this means: on progress in the Iran settlement, buy the euro; on escalation, sell. But what if there is a ceasefire, yet the Strait of Hormuz remains under Iranian Administration control? Then oil prices do not fall, real rates do not diverge, and the euro loses this catalyst. This is precisely the scenario the market is currently trying to assess.
Fourth: a new variable has appeared in the market—the Fed itself has become a source of uncertainty. As analysts note, leadership changes and internal debates about the direction of monetary policy make the Fed less predictable than at any time since COVID. This shortens the planning horizon for investors and increases volatility.
Forecast: Next 30 Days and 90 Days
Next 30 days (until June 10):
- EUR/USD will test historical resistance levels at 1.1775–1.1805. A break above would open the way to 1.1865. If a framework ceasefire between the US and Iran is announced, the pair could reach 1.19 within 3-5 trading sessions.
- The dollar will continue to lose safe-haven appeal if clashes in the Strait of Hormuz persist. Paradox: each new escalation strengthens the euro because the market prices in future de-escalation and the associated fall in oil prices.
- May NFP will be released in early June and will be an important test: if the labor market remains resilient amid high oil prices, the Fed may raise rates again, temporarily supporting the dollar and correcting EUR/USD to 1.16-1.17.
- Trump will use every pullback in oil prices to claim progress in the settlement, adding volatility, but the overall trend of dollar weakening will continue.
Next 90 days (until August 10):
- Scenario A (55% probability): a framework ceasefire is concluded, the Strait of Hormuz is gradually opened. Brent falls to $78-82. The Commerzbank real rate mechanism works in full force: eurozone inflation expectations fall more than US ones, the real differential widens in favor of the euro. EUR/USD settles above 1.20—possibly reaching 1.22.
- Scenario B (30% probability): no ceasefire, the conflict drags on. Brent stays above $100. The dollar is trapped: safe-haven demand is suppressed by high US gasoline prices, and a hawkish Fed weighs on the economy. EUR/USD fluctuates in the 1.15-1.18 range, with sharp rebounds on any hints of negotiations.
- Scenario C (15% probability): a ceasefire exists, but Iran maintains the "Strait of Hormuz Administration" and the shipping risk premium does not disappear. Oil prices decline but not to pre-war levels. EUR/USD gradually rises to 1.19-1.20, but without sharp moves.
The key indicator for the coming weeks is not the euro exchange rate itself, but the yield differential between 10-year US and German government bonds. If the spread begins to narrow in favor of Bunds, it will confirm that the real rate mechanism is working, and EUR/USD will go higher. If the spread remains stable while oil prices fall, the Commerzbank model has failed, and other forces—likely political—are driving the market. Watch the 10-year Bunds and UST.
— Editorial Team
