The EUR/USD is facing challenges after a recent decline. The pair was expected to adjust, but it has already hit a target of 1.15. In recent months, EUR/USD has seen a prolonged rally. Current market data shows a short position on the USD while investors remain optimistic about the EUR. This situation could lead to short-covering favoring the USD.

Eurozone Economy

Despite some recent weakness, the EUR has been one of the top-performing G10 currencies, gaining almost 6% against the USD since mid-March. Germany’s fiscal policies are helping stimulate the Eurozone economy. Europe depends on the US for NATO support, especially given the situation in Ukraine. However, uncertainties around energy prices and trade agreements are challenging for European exporters. A strong EUR is not beneficial for these exporters. We expect the EUR to soften in the coming months, particularly with anticipated Fed rate cuts in 2026, which may lead to a rise in EUR/USD in the next 6 to 12 months. This information carries risks and is not financial advice. It’s wise to do comprehensive research before making investment decisions, keeping in mind the associated risks.

Market Positioning

The EUR/USD pair is having trouble staying above 1.15 after its notable increase. The rally since mid-March appears to be overstretched, making a downward correction likely. Since the pair has already met its forecast, caution is warranted for any potential gains in the short term. Market positioning shows a crowded trade, with many investors holding long positions on the Euro and short positions on the USD. The latest Commitment of Traders report indicates these long Euro positions are near record highs for 2025, suggesting a quick reversal is possible. Such crowded positioning often leads to sharp price movements as traders adjust their bets, which would favor the dollar. A strong Euro at this level does not support European exporters, particularly with energy costs uncertain as winter approaches. In past cycles, like in the late 2010s, a rapidly rising Euro has prompted comments from European Central Bank officials. Thus, we should think about strategies that could profit if the Euro declines, such as buying put options. With this outlook for the upcoming weeks, traders may want to position themselves for a weaker EUR/USD. This strategy could involve buying put options to bet on a drop below key support levels, perhaps targeting around 1.1350 initially. Selling call options or setting up bear put spreads could also be effective ways to prepare for a decline while managing trade costs. However, it’s important to note that this bearish view is only for the short term. The possibility of the Federal Reserve cutting interest rates in 2026 provides a floor for how much the EUR/USD might drop. Any short-term trades should come with a clear exit strategy to prepare for the longer-term trends. Create your live VT Markets account and start trading now.

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