EUR/USD has hit a five-week low following the US-EU trade deal. Today, the pair has dropped by 0.2%, reaching a low of 1.1555, the weakest level since June 23. European lawmakers are still worried about the trade agreement, finding it unsatisfactory. Currently, the July lows, between 1.1560 and 1.1572, serve as support for EUR/USD. If the pressure on the euro continues, this support level may be broken, pushing further down towards 1.1500. The 38.2% Fibonacci retracement from May’s increase is at 1.1537, while stronger resistance could be at the 50.0% retracement around 1.1447 if the euro remains weak.

Influence Of Dollar Strength

The euro’s decline is also due to the strong dollar, which is affecting other currency pairs. GBP/USD has decreased by 0.2% to 1.3330, while AUD/USD has dropped by 0.1% to 0.6513. Meanwhile, USD/JPY has decreased slightly by 0.1% to 148.35. The ongoing pressure on the euro, driven by dissatisfaction with the US-EU trade deal, suggests a bearish outlook for us. We recommend that derivative traders consider buying put options on the EUR/USD. This could be profitable if the currency pair continues to fall below current support levels. Fundamental economic data supports this viewpoint, showing a gap in central bank policies. Recent inflation in the Eurozone has fallen to 2.4%, while U.S. inflation remains steady at 3.2%. The European Central Bank is indicating rate cuts sooner than the Federal Reserve. This interest rate difference gives the dollar a strong advantage over the euro.

Market Conditions And Strategy

Current market conditions are favorable, as options pricing is relatively low. The Cboe EuroCurrency Volatility Index is around 6.5, a historically low level suggesting that the cost of buying puts hasn’t fully accounted for the rising risk of a breakdown. We see this as a great opportunity to set up bearish positions before volatility might increase. A clear drop below the 1.1560-72 support area would signal a strong bearish trend. Historically, these technical breaks can speed up downward movement, quickly bringing the 1.1447 retracement level into play. We recall the sharp drop in 2022 when parity was broken, showing how swiftly market sentiment can shift after key levels are breached. For traders looking to manage risk and lower premium costs, we recommend using bear put spreads. By selling a lower-strike put along with the one being purchased, a trader can lower the initial cash investment. This strategy is wise for targeting the 1.1500 area, as it clarifies both risk and reward while benefitting from a moderate decline. Create your live VT Markets account and start trading now.

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