The Euro has increased by 0.7% against the US Dollar, bouncing back from a recent decline that followed December’s highs. This rise is closely tied to a strong correlation with its three-month risk reversal, which sits at 0.96 based on a 21-session rolling average. A positive ZEW sentiment survey for Germany and the euro area supports this increase. The survey is a good indicator of industrial activity, providing reassurance to the European Central Bank (ECB). ECB official Villeroy’s comments are neutral and highlight ongoing inflation risks. Boris Vujcic from Croatia’s central bank will soon join the ECB’s Executive Board.

Euro Breaks Key Moving Averages

The Euro has moved above its 50-day moving average of 1.1666 and is currently supported by the 200-day moving average of 1.1592. The Relative Strength Index is showing a return to a bullish trend. If the Euro crosses the December high of just above 1.18, attention will shift to the mid-September high of 1.1919. In the near term, analysts expect the Euro to trade between 1.17 and 1.18. Looking back to the same time in 2025, the Euro experienced a strong bullish signal by breaking key technical levels, fueled by rising sentiment. This was confirmed by a significant jump in the German ZEW survey, which eased concerns for European Central Bank officials. This sentiment pushed the EUR/USD exchange rate above its 50-day moving average. Last year’s rally was a classic example, as the correlation between the Euro and market sentiment was very high. Positive economic data provided a solid reason to buy, and the EUR/USD pair rallied toward the 1.1900 level over the following month. This historical example shows how quickly shifts in key indicators can lead to substantial market movements.

Current Market Conditions

Today, the context is different. Ongoing inflation concerns and a cautious stance from the ECB are significant factors. Recent Eurozone inflation data indicated a headline rate of 2.1%, which remains above the ECB’s goal, making any dovish pivot challenging. Unlike the clear optimism seen in early 2025, the market is now anticipating a period of slower growth, with the latest German industrial production data showing a 0.5% decline last month. Given this situation, traders may want to hedge against possible Euro weakness. With the EUR/USD currently trading near 1.0850, buying put options with a strike price around 1.0700 could provide protection against a potential downturn. This strategy allows traders to benefit from declines while managing initial costs. The low implied volatility, with the Euro Currency Volatility Index (EVZ) near multi-year lows around 5.8, makes it relatively cheap to buy options. This market condition is favorable for setting up bearish positions or hedges without overspending. Traders should keep an eye on a break below the 200-day moving average, currently at 1.0800, as this could signal further declines. Create your live VT Markets account and start trading now.

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