EURUSD rose after the core CPI came in lower than expected at 0.2% (unrounded 0.228%). The price hit a high of 1.1690, just shy of the 100-hour moving average at 1.16922. Sellers were active below this average all day, and trading on Friday also paused at this point. Resistance at the 100-hour moving average is crucial for future movements. A strong break above this level could shift the market’s outlook from bearish to bullish.

Essential Swing Zone

On the downside, the range between 1.1663 and 1.1691 is a key swing zone, marked from April to November 2021. The price dipped below this zone several times, including earlier today. After the data was released, a low of 1.16616 was noted, slightly below this range, before the price bounced back. While the 100-hour moving average is critical for resistance, staying below 1.1663 is equally important for downward trends. We are witnessing a classic battleground following the recent US inflation data. The U.S. core CPI came in at 0.2% for May, with the annual rate falling to 3.4%. This gave the Euro an initial boost, but it quickly faced strong selling pressure right at the significant 100-hour moving average. This level has repeatedly limited gains in recent trading sessions, highlighting the market’s uncertainty.

Strategy and Volatility

For derivative traders, this situation isn’t about picking a direction—it’s about trading the tension. The divergence between central banks has become the main focus. While the Federal Reserve may have enough justification to consider a rate cut later this year, the European Central Bank (ECB) is grappling with its challenges. Eurozone inflation recently rose to 2.6% in May, surprising many and complicating the ECB’s path after its recent quarter-point rate cut. This creates a strong push-pull dynamic, keeping the currency pair in a tight range. Our strategy should focus on volatility. Implied volatility for EUR/USD options has been increasing, and we believe it remains undervalued given the conflicting factors at play. We plan to set up long strangles, buying both an out-of-the-money call and put option. This will allow us to profit from a significant breakout in either direction, which we see as likely. The key is to position this trade ahead of major catalysts, such as statements from central bank officials or upcoming flash PMI releases. Historically, periods of policy divergence, like the one during 2014-2015 when the ECB started quantitative easing while the Fed prepared to raise rates, are not smooth. They are marked by sharp swings and false starts before the main trend becomes clear. On the downside, a decisive break below the important swing zone between 1.0800 and 1.0825 would be our signal. Conversely, if there’s a sustained move above the 100-hour moving average, especially with a dovish Fed approach, that would signal the opposite. Until one of these levels breaks decisively, trading within the range is risky; however, there is an opportunity in waiting for a sharp break of that range. Create your live VT Markets account and start trading now.

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