During the second quarter, the euro performed well compared to other G10 currencies. This was mainly due to a decline in the USD’s value, strong financial markets in the Eurozone, and the euro being the second-most popular reserve currency. The ECB has mixed feelings about the euro’s strength. Some officials appreciate the benefits of a stronger euro, like better financial conditions, but they often overlook the risks it poses to competitiveness and inflation.

ECB Position on the Euro

There isn’t a clear definition of what a “strong” euro is, but recent statements suggest that the current EUR/USD rates, likely to remain around 1.10 until 2025-26, are acceptable. Credit Agricole believes this rate is fair, but cautions that there are limits to the ECB’s comfort with this level. If the euro continues to rise, it may hurt Eurozone growth and inflation. This week, all eyes will be on Eurozone data and ECB speeches to see if their stance changes. Even though the ECB appears satisfied with the current exchange rate, Credit Agricole is unsure if that will hold if the euro strengthens further, since it could endanger inflation goals and growth recovery. Recently, markets started to consider that policymakers might tolerate the current euro level more. This happens as inflation metrics get closer to medium-term targets. This isn’t the first time we’ve seen this pattern: when authorities seem comfortable with the euro’s price movement, market volatility tends to decrease, only to spike again when economic data reveals long-term effects. Previous comments from Nagel and Schnabel, while not conclusive, suggest that the Governing Council is not currently stressed about the euro’s strength. However, we know from past experiences that this comfort can vanish quickly if macroeconomic signals weaken.

Market Strategy and Caution

We interpret this as a sign of caution—not through direct policy changes, but due to a lack of resistance. Market participants often forget past caution, and once complacency sets in, it’s hard to change without disrupting the market. At the moment, the euro seems stable, but this depends on core inflation staying steady and energy prices not rising erratically. What we’re observing closely isn’t just whether officials positively discuss the current exchange range, but when they stop doing so. Often, it’s the silences—rather than the speeches—that signal a change in attitude. During the summer months, when trading is quieter and volumes drop, movements that would usually be dismissed can become chaotic, triggering responses that would otherwise remain idle. This is why caution outweighs confidence. We should manage directional exposure with stricter premium limits and shorter time frames. Sensitivity to changes rises in uncertain policy situations. If realized volatility decreases, like it did in past stable periods, options pricing may be less supportive for implied volatility—making it tougher to profit from long positions and less appealing to consider straddles. Moving forward, outcomes will depend less on new statements and more on economic reports—particularly employment trends and sentiment indicators. If growth shows significant downward surprises, we expect responses not in rate policy, but in comments aimed at controlling excess currency strength. Tolerance can quickly fade under pressure from exporters and weaker sectors. We’re also watching positioning data closely. If trading trends favor euro strength too heavily from leveraged accounts, the risk of a quick reversal increases. Historically, these positions unwind fast when the ECB indicates that slower growth or continued energy price declines necessitate a weaker euro. Bonds have already started reflecting this uncertainty with a slight steepening in peripheral curves. For hedgers, the next two weeks are crucial. Premiums are still reasonable but decreasing compared to last month. As implied volatility adjusts to a more stable policy outlook, longer-term options might provide better value than weekly options that may carry a hint of complacency. We prefer options that allow for slight euro weakness under stable-to-lower rate conditions. Remember: when policymakers seem content, it’s often time to prepare for change. Opportunities tend to arise not from reassurance but from early dislocations that precede broader market adjustments. So far, everything remains within accepted ranges, but the factors that make this acceptable are not fixed—they are conditional and, most importantly, limited. Timing is less important than discipline. Create your live VT Markets account and start trading now.

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