The Euro is down 0.2% against the US Dollar, reflecting overall strength in the USD. As we approach Thursday’s European Central Bank (ECB) meeting, the market expects the deposit rate to stay at 2.00%. Traders anticipate updates on economic forecasts and a slightly more hawkish tone. Recent data shows that shrinking interest rate differences play an important role in the Euro’s value. Short-term studies indicate a strong connection. Eurozone inflation figures align with expectations, showing a 2.1% year-on-year headline and a 2.4% year-on-year core inflation rate, while Germany’s IFO business sentiment survey was somewhat disappointing.

The Rally Pausing

The EUR/USD rally seems to have slowed down after rising from November lows of about 1.15, although bullish momentum remains. The Relative Strength Index (RSI) indicates a retreat from overbought conditions near 70. There may be near-term support at 1.1680 and resistance above 1.1750. As the week progresses, the Euro is showing weakness against a strong US Dollar, trading around 1.0850. This behavior is largely influenced by anticipated actions from central banks. The market expects the US Federal Reserve to pause rate changes while looking for a more hawkish stance from the ECB. Attention is fixed on the ECB meeting next week. We expect the deposit rate to be kept at 3.75%, but the ECB may hint at future changes. Recent Eurozone inflation data, showing a rise to 2.8% last month, supports this hawkish outlook. In contrast, US inflation data indicates cooling core inflation at 2.5%, allowing the Fed some leeway to pause its rate hikes.

Impact on Traders

For derivative traders, it’s essential to watch for volatility ahead of the ECB announcement. Implied volatility for short-term EUR/USD options is rising, reflecting market uncertainty. Buying call options on the Euro might be a smart way to prepare for a potential hawkish surprise, giving traders upside exposure while managing risk. This situation differs from late 2023 when the ECB rate peaked at 4.00% before the easing cycle of 2024. Back then, the EUR/USD traded significantly higher, focusing on a different set of rate expectations. Now, the market’s attention shifts to who will be the last to cut rates or the first to resume increases. The Euro’s recent rally, from the November lows near 1.06, appears to be stabilizing. Momentum indicators like the RSI are easing from overbought levels. We identify immediate support at the 1.0780 level and resistance just above 1.0950. A bull call spread could be an effective strategy to take advantage of potential movements towards that resistance while limiting costs. Create your live VT Markets account and start trading now.

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