On July 25, FX option expiries are centered around one important level: the EUR/USD option at 1.1745. The EUR/USD pair saw a slight rise after the European Central Bank (ECB) announced plans to pause interest rate changes through September. However, its upward momentum is limited since markets expect one more rate cut by the end of the year.

Key Technical Levels

The overall trend this week remains positive, even though the dollar is trying to regain strength. The upcoming expiry may limit price changes as traders evaluate trade developments for next week. A key level to watch is the 100-hour moving average at 1.1723, which might have a bigger impact than the day’s expiries. Looking at the forecast, large option expiries are likely to hold prices steady in the short term, but central bank policies will drive the bigger trend for the upcoming weeks. Traders should focus on the overall economic situation rather than getting caught up in daily price movements. The ongoing story is a dovish ECB compared to a steady Federal Reserve. We believe traders should prepare for continued dollar strength or at least limited upside for the euro. The ECB started cutting rates in early June when Eurozone inflation was at 2.6% in May, showing their willingness to tolerate higher inflation to support growth. This is in stark contrast to the U.S., where the latest Consumer Price Index stands at 3.3%, prompting the Federal Reserve to hold its ground and possibly only make one rate cut this year.

Historical Context and Strategies

Historically, this difference in policy has strengthened the dollar against the euro, as seen from 2014 to 2016 when the ECB eased policy while the Fed prepared to hike. Therefore, we should consider strategies that benefit from a stable or slightly lower EUR/USD. Selling out-of-the-money call options or setting up put spreads could be effective ways to leverage this outlook. Current market data shows that one-month implied volatility for EUR/USD is near multi-year lows, recently around 5.5%. This makes buying options cheaper, but it also indicates market complacency, which we can turn to our advantage. We think selling volatility through strategies like short strangles, with strikes placed outside important technical levels like the 200-day moving average, offers a strong risk-reward setup. Create your live VT Markets account and start trading now.

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