Executive Summary
EUR/USD trades at 1.1613, down 2.2% over the past month and 3.4% from the January 2026 high of 1.2019, as the US-Israeli military strikes on Iran have triggered a classic risk-off USD bid that has overwhelmed the euro's structurally improved fundamental story. Over the past year, EUR/USD has appreciated 6.4%, driven by Germany's historic €500bn infrastructure fund, the ECB's completed easing cycle to 2.00%, and narrowing UST-Bund spreads. The ECB NEER (EER-40) at 129.5 and a REER near 97.7 suggest fair-to-modestly-cheap valuation, particularly against USD purchasing power parity of ~1.30. The central tension is between a powerful medium-term fiscal-and-growth narrative (German rearmament, manufacturing inflection, Fed-ECB convergence) and a near-term energy shock that has repriced ECB rate expectations from "on hold indefinitely" to two hikes by December 2026. The February HICP overshoot (1.9% headline, 2.4% core, 3.4% services) reinforces the hawkish repricing while simultaneously threatening the growth recovery that underpins the strategic bull case. Tactically bearish EUR with low conviction as energy uncertainty, positioning unwinds, and the March 18-19 ECB super-week dominate; strategically bullish with moderate conviction as the fiscal expansion and policy convergence thesis remains intact provided the Iran shock proves transitory.