The EUR/USD pair has shifted from its session highs near 1.1700 but is still up 0.4% for the day. Even though the Eurozone Sentix data showed improved economic confidence, this has not significantly strengthened the Euro. The weakness of the US Dollar supports the EUR/USD pair, particularly amid tensions involving US President Donald Trump and Federal Reserve Chairman Jerome Powell. A criminal investigation into Powell’s Senate testimony raises worries about the Fed’s independence, which affects the USD’s value.

Geopolitical Tensions Impact Currency Markets

Tensions in Iran have grown as reports indicate that the regime has killed hundreds of protesters. Fears of possible US intervention add to the geopolitical uncertainties shaping currency markets. New US economic data, including the Consumer Price Index and speeches from the Fed, might offer more insights into the central bank’s monetary policy. The Eurozone Sentix Economic Confidence Index increased to -1.8 in January, improving from -6.2 in December. This shows a positive outlook, although its impact on the Euro has been limited. EUR/USD is trading within a downward channel, facing resistance around 1.1700 and support just above 1.1615. Technical indicators suggest potential upward momentum, with resistance at 1.1742 and support at 1.1590. The Sentix Investor Confidence survey reflects market sentiment about the economic outlook. The key issue now is the significant pressure on the US Dollar due to an unprecedented criminal investigation into the Fed Chairman. This attack on the central bank’s independence is shaking global confidence in the dollar, driving market moves. Normally, geopolitical risks in Iran would strengthen the safe-haven dollar, but this domestic political crisis overshadows them. With the dollar weak, we should prepare for the EUR/USD pair to gain strength, especially as it approaches the important 1.1700 resistance level. The positive change in the Eurozone Sentix investor confidence adds a strong, though secondary, reason to favor the euro. The technical indicators are also showing positive signs, suggesting that last year’s bearish pressure is lessening.

Market Volatility and Strategic Positioning

This situation is reminiscent of political pressures on the Fed in 2019, when similar uncertainties caused the Dollar Index (DXY) to drop by over 3% in the last half of the year. We are seeing a similar trend now, with the DXY losing nearly 1.2% in just the past two weeks. This historical pattern indicates that the dollar’s weakness could continue as long as the Fed’s credibility is in doubt. The political turmoil is causing increased volatility in the market, with the Cboe EuroCurrency Volatility Index (EVZ) rising to 7.8, its highest level in three months. In this situation, using options can be a smarter risk management strategy rather than taking direct positions. While implied volatility makes buying options more costly, it also indicates the likelihood of sharp price swings. A simple strategy is to buy EUR/USD call options with a strike price just above the current resistance, maybe at 1.1750, set to expire in mid-February. This would let us profit from a potential breakout while limiting our loss to the premium paid for the option. This approach captures the upside if the USD’s political crisis deepens after the upcoming Fed speeches. For those looking to reduce entry costs, a bull call spread is a practical alternative. This involves buying the 1.1750 strike call and simultaneously selling a 1.1850 strike call for the same expiration. This strategy lowers the initial cash expense while still allowing for a profit from a moderate increase in EUR/USD, which makes sense in these uncertain times. We need to stay cautious ahead of tomorrow’s US Consumer Price Index (CPI) report. After seeing core inflation average around 3.8% in Q4 2025, a surprisingly high inflation figure could prompt the Fed to act and lead to a sharp, though temporary, rally in the dollar. Any positions should be sized to handle a potential spike in volatility around the data release. Create your live VT Markets account and start trading now.

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