The Euro has dropped from its recent peak against the US Dollar due to uncertainty about a trade deal between the EU and US. Traders are likely to be cautious before the European Central Bank’s (ECB) upcoming meeting. After a 1.3% rise over three days, the EUR/USD pair is now lower, reflecting worries about stalled trade talks. All eyes are on the release of the Eurozone Consumer Sentiment Index and the ECB’s policy decision.

Euro’s Decline Against the Dollar

On Tuesday, the Euro fell to 1.1730 from a two-week high of 1.1760, but it remains above the support level of 1.1720. Market sentiment will depend on the ECB’s upcoming decision, especially with fears of a trade war looming. The preliminary Consumer Sentiment Index for July is expected to show a reading of -15, slightly better than the previous -15.3. In other news, a trade deal between the US and Japan has resulted in lowered tariffs, with Japan promising to invest heavily in the US. The EUR/USD pair still has a positive outlook while staying above 1.1720, supported by a strong market structure. However, falling below this support could lead to a drop toward 1.1680. We think the current caution about the Euro is warranted before the central bank’s meeting. Traders should be aware that these events often lead to increased volatility, making long-term, unhedged positions particularly risky in the coming days.

Market Expectations and Policy Divergence

With Eurozone inflation reaching a record high of 8.6% in June, there are high expectations for a strong policy response. We anticipate at least a 25 basis point rate hike, the first in over a decade. If analysts’ predictions of a surprising 50 basis point increase are realized, it could lead to a significant spike in the currency pair. Given the key support at 1.1720, there are opportunities for derivative plays. Buying put options with a strike price just below this level could be a cost-effective way to guard against a drop. This would protect against a market disappointment following the policy announcement. The overall economic outlook suggests caution, highlighted by the German GfK Consumer Climate index plummeting to a record low of -27.4. This weak sentiment indicates vulnerability in the economy, which could limit any rallies in the Euro. It also illustrates a potential conflict for policymakers between controlling inflation and fostering growth. Concerns about stalled trade negotiations between major economic powers will likely cap the Euro’s potential for growth. While smaller collaborative efforts continue, the lack of a significant agreement means there’s less chance for a major boost for the Euro. Sustained rallies above recent peaks seem unlikely for now. Historically, different policies from central banks have created strong trends in currency values. If European officials indicate a more aggressive rate hike than expected, it could lead to a significant shift. Using long-dated call options could be one strategy to benefit from a longer-term bullish reversal. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now