The Euro is in a fragile position, with the EUR/USD showing slight declines, currently at 1.1560, close to the 1.1540 support level. Eurozone inflation met expectations, easing to 2.1% annually, while core inflation held steady at 2.4%. Monthly consumer prices rose to 0.2% from 0.1% last month, and the core index increased by 0.3%. The US Dollar is gaining strength due to risk aversion and lower expectations for a Federal Reserve rate cut, following assertive comments and a new trade agreement between the US and China. The European Central Bank kept its rate steady, with President Lagarde optimistic about growth despite inflation uncertainties. US Treasury yields have jumped more than 30 basis points since Wednesday.

Euro Influences

The EUR/USD faces resistance around 1.1580 and has support near 1.1545. Current bearish momentum suggests a possible target around the 1.1450 mark. The Euro’s strength is shaped by economic factors such as inflation, GDP, PMIs, and trade balance, with the ECB’s policies being critical. The Eurozone’s trade balance, which reflects export-import relationships, also affects its strength. The Euro appears vulnerable against the Dollar, with sellers eyeing the 1.1540 level due to cooling Eurozone inflation and a more assertive Federal Reserve. Signs indicate this trend may persist in the upcoming weeks. Recent Eurozone inflation data supports this outlook, with Eurostat’s preliminary estimate for October showing a drop to 2.1%. In comparison, the latest US data from the Bureau of Economic Analysis indicates core personal consumption expenditures (PCE) inflation remains steady at 3.5%. This clear inflation disparity strengthens the case for a weaker Euro. The European Central Bank seems comfortable maintaining its 2.0% rate, whereas the Federal Reserve is hinting at a prolonged period of high rates. After this week’s Fed meeting, the CME FedWatch Tool shows reduced expectations for a December rate cut, with the probability dropping to 64.8%. This difference between the central banks is a major influence on the currency markets right now.

Impact on US Treasury Yields and Derivatives

This gap in policy is pushing US Treasury yields higher, with the 10-year note reaching 4.10%, which attracts capital to the US dollar. A similar trend occurred between 2014 and 2015 when ECB easing and Fed tightening led to a decline of over 20% in the EUR/USD. The current situation feels similar to that time. For derivative traders, this environment suggests pursuing bearish strategies on the EUR/USD pair in the coming weeks. Buying put options with strike prices below the 1.1540 support level, such as around 1.1500 or 1.1450, could effectively capitalize on a continued decline. These options would gain value if the pair breaks critical technical levels. Alternatively, selling call spreads with the short leg around the 1.1580 resistance level would be a safer strategy. This approach profits if the pair remains below this key resistance, benefiting from both a price drop and the passage of time. It allows traders to profit from the pair’s inability to maintain upward movement. Technical charts reinforce this negative outlook as the pair has broken its monthly triangle pattern, and momentum indicators are negative. Any short-term rebounds towards the 1.1580 resistance could present opportunities to start or enhance these bearish positions. The most likely direction seems to be downward. Create your live VT Markets account and start trading now.

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