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The euro is recovering but upside will be limited by ongoing hostilities.

Euro-dollar rises to 1.1648 from Monday's low at 1.1507 amidst a settling in global energy prices on clear signs the Middle East conflict has a limited shelf-life.

U.S. President Donald Trump indicated overnight he thinks the war will resolve "very soon."

Support for euro-dollar at 1.15 indicates a solid floor has been etched onto the chart. Chris Turner, lead FX analyst at ING Bank says:

"The 1.1500 level in EUR/USD withstood some pressure yesterday, but events managed to see it hold. Our FX option traders noted that even with EUR/USD offered early yesterday, the FX option market was not buying into a big downside breakout."

He explains: "Here, the one-month risk reversal, the cost of an EUR put option over an EUR call option, went less bid for EUR puts," says Turner.

Underpinning the euro versus the dollar is the recent shift in interest rate expectations on either side of the Atlantic, with traditional FX theory suggesting they have evolved in a manner that favours the euro.

Interest rate expectations have shifted dramatically over recent days as traders bet higher oil and gas prices will stoke inflation and prompt central banks to respond via interest rate rises.

However, rates have shifted more dramatically in some jurisdictions than they have elsewhere, and that has implications for the impacted currencies:

In the U.S. money markets show investors raised expectations for the outlook of Fed interest rates by just 25bp.

This signals investors think the energy shock would not have such a large impact on U.S. inflation.

However, "the reaction in Europe has been larger. Here, EUR ESTR has been marked 65bp higher and GBP OIS a whopping 80bp," notes Turner.

Clearly, the market's view is that the UK faces the more dramatic inflationary surge, which also explains how GBP/EUR has outperformed over recent days.

Where the Bank of England was expected to cut rates twice in 2026 just two weeks ago, now the market sees a hike of 25bp.

These dynamics can assist the likes of EUR and GBP in finding support against USD.

That being said, ING's Turner warns the upside potential in the currency pairs will be limited; after all, there's still a conflict underway in the Middle East.

As of the time of writing Tuesday, Iran has reaffirmed it's not seeking a truce. The comments follow Donald Trump's suggestion overnight that he thought the war would end shortly.

At the same time, there are reports of an explosion of an oil tanker near Abu Dhab, confirming the Strait of Hormuz, through which Middle Eastern gas and oil transits, is by no means open.

Ongoing risks will keep USD supported.

"1.1650 is the initial resistance for EUR/USD and it is not clear that EUR/USD needs to rally much more today unless we see some material progress towards a ceasefire," says Turner.