CFTC data shows that net long positions on EUR/USD have climbed to 15.6% of open interest since July 15, the highest level since January 2024. However, this figure still appears limited since the currency pair is nearly 10% higher than in early 2024, suggesting that capital and hedging flows are driving the dollar’s decline. A no-deal outcome in US-EU trade talks is looking more likely, with some EU countries possibly considering retaliatory measures. This situation could lead to an escalation of tariffs if tensions continue to rise.

Euro’s Advantage Over Dollar

The euro might keep its advantage over the dollar if the EU doesn’t suffer major losses while other countries strike better deals with the US. Right now, the euro isn’t facing any pressure from domestic tariffs, and markets don’t expect a more dovish policy from the ECB before the upcoming meeting on Thursday. The next expected interest rate cut is in December, and there isn’t enough momentum to drive EUR/USD back to early July highs. The pair is more likely to stabilize around 1.160 instead of reaching 1.170, given the risks of further hawkish moves by the Federal Reserve. Recent increases in bullish positions on the euro show some trader optimism, but we see this as limited. Our review of the latest data indicates a slight drop from these highs, pointing to growing caution. This backs our belief that the dollar’s decline is more about overall capital shifts rather than a rush into the euro.

Trade Outcome Implications

We view the increasing likelihood of a no-deal trade outcome as a major challenge for the currency pair. With the upcoming US presidential election, both main candidates have hinted at tough trade policies, raising tensions and uncertainty. Historically, times of rising global trade disputes, like those seen in 2018-2019, have benefited the dollar as a safe-haven asset, a risk traders should keep in mind. While markets aren’t expecting surprises from the European Central Bank this week, the outlook appears to limit the euro’s potential for growth. Money markets currently project over a 70% chance of a rate cut in December. In contrast, recent US job data, showing 272,000 new positions added, strengthens the possibility of a more cautious approach from the Federal Reserve. Amid these mixed signals, we think the pair will find it hard to reach the 1.170 mark. A strategy of selling call options with strikes above that level might be wise, taking advantage of expected stable behavior around the 1.160 level. With one-month implied volatility low at about 5.5%, buying protective put options below 1.150 provides a cost-effective way to guard against sudden trade tensions. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now