EUR/USD is currently not very volatile, hovering around 5%. The pair is mostly moving sideways. Traders prefer the Euro for low-cost carry trades because it is less volatile compared to the Japanese Yen. One-month EUR/USD volatility stays close to 5%, indicating little movement expected soon. The Euro’s funding cost is low, with an implied yield of 2.00%, attracting carry trades, while the U.S. dollar has a higher rate at 3.55%.

Carry Trades and Market Observations

Using the Euro for carry funding is seen as less risky than using the Yen. This is due to the higher volatility of USD/JPY at 8.5%. There’s a chance that the Bank of Japan could intervene, which would strongly impact the USD/JPY rate. As the Eurozone has limited economic data available, EUR/USD might gently drift towards 1.1555/65. This insight comes from expert market analysis. With EUR/USD showing consistently low volatility, options premiums are quite cheap. The EuroCurrency Volatility Index has been below 6.0 for weeks, making it a great time to buy strangles or straddles. These strategies could benefit if the market breaks out of its tight trading range since late 2025.

Market Themes and Trading Strategies

The main market trend is selling the Euro to fund carry trades, as the interest rate gap between the Federal Reserve and the ECB supports the dollar. Recent data from early January indicates that speculators hold many short Euro positions, reinforcing this trend. Therefore, range-bound strategies should likely lean bearish, such as selling out-of-the-money calls. The Euro remains a safer choice for funding compared to the Japanese Yen. We remember the chaos that followed when the Bank of Japan normalized its policy in 2025, and the risk of intervention is still present. The Euro offers a cleaner short without the risk of sudden central bank actions. Currently, with EUR/USD around 1.0820, the previous targets near 1.15 seem far off. The lack of significant economic data from the Eurozone in the weeks ahead strengthens the case for range-trading strategies. Traders should think about selling call spreads to earn premiums while managing risk, utilizing both the low volatility and the downward pressure in the market. Create your live VT Markets account and start trading now.

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