The EUR/USD exchange rate is likely to rise above $1.2000 by the end of the year. This prediction came before the no-confidence vote regarding France’s Prime Minister.

Euro Strength and Monetary Policies

The strength of the euro comes from the different monetary policies of the Federal Reserve and the European Central Bank (ECB). The Federal Reserve is expected to cut interest rates again on September 17. On the other hand, the ECB seems reluctant to lower rates further, suggesting it will keep them steady. This difference in policies supports the euro’s upward movement. We believe that EUR/USD will get stronger, reaching close to $1.2000 by the end of the year. This is based on the growing gap in monetary policy between the two central banks. The Federal Reserve is anticipated to lower interest rates at its meeting next week. In contrast, the ECB appears cautious about cutting rates again. Recent data supports our view: August’s Eurozone inflation was 2.7%, while the U.S. Core PCE inflation for July was 2.6%. This difference in inflation and central bank reactions drives our outlook.

Traders’ Positioning and Strategies

For traders, this scenario suggests preparing for euro strength in the coming weeks. We are considering buying EUR/USD call options with strike prices near $1.2000, expiring in the fourth quarter. This gives a direct way to profit from the expected increase. While we note the political uncertainty in France, we believe it won’t disrupt this trend. A similar situation occurred in the summer of 2024 when markets looked past French elections, focusing on the wider economic situation. Therefore, the current volatility might provide a good opportunity for bullish positions. A more cautious strategy we’re exploring is the bull call spread. This involves buying a call option with a lower strike price, like $1.1900, and selling a call with a higher strike price, around $1.2100, for a later expiration. This method lowers the initial cost and still benefits from a gradual increase in the currency pair. Another approach to express this outlook is by selling out-of-the-money put options. Considering the ECB’s firm position, we think there is a strong support level for the euro. Selling puts with a strike price of about $1.1750 allows us to collect premium based on the belief that dips below that level are unlikely to last long. Create your live VT Markets account and start trading now.

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