The Euro has dipped 0.2% against the US Dollar, falling behind other G10 currencies. This decline comes as markets gear up for the ECB announcement on Thursday and await the manufacturing and services PMI data, with manufacturing likely still in contraction. Recent trade sentiment has been affected by an agreement between the US and Japan, while progress on US-EU agreements seems to be stuck. Attention will be on how the ECB communicates on Thursday, as traders expect a possible 25-basis point rate cut by year-end.

Technical Analysis And Market Risks

Since February, the Euro has been on a trend of higher lows and higher highs. The RSI is in a bullish range, and the 50-day moving average offers medium-term support. Support is noted below 1.1650, while resistance is anticipated above 1.1780, indicating a cautious market outlook. Traders should pay attention to risks and uncertainties, and it’s important to do thorough research before investing. Readers should keep in mind the risks associated with trading foreign exchange on margin, which can lead to significant financial losses. Looking ahead, the key driver for the Euro will be the central bank’s policy meeting on June 6th. Markets currently predict over a 90% chance of a 25-basis point interest rate cut, which seems to be already priced in, making surprises less likely. New economic data reveals a two-speed economy. While S&P Global’s HCOB Manufacturing PMI for May stayed in contraction at 47.4, the services sector showed strong growth, pushing the composite index to a 12-month high. This mixed performance complicates a straightforward bearish outlook for the Euro.

Investment Strategies And Market Outlook

The uncertainty about the central bank’s future guidance, rather than the cut itself, is expected to increase short-term implied volatility. Traders may want to consider strategies that react to price movements, regardless of direction. Buying straddles or strangles on the EUR/USD could effectively position for swings after the announcement. Due to the trend of higher lows since February, a “sell the rumor, buy the fact” response seems possible. Cautiously bullish traders might consider purchasing call spreads to limit costs and potential trade risks. This strategy prepares for a modest rally while capping maximum losses upfront. Typically, the market quickly focuses on the pace of future rate cuts after the first reduction. If Thursday’s announcement feels uncertain about future moves, it could lead to a short squeeze. The potential divergence in policy with a more dovish U.S. Federal Reserve is an important theme to watch. We are monitoring key levels, with significant support around 1.0800 and resistance near 1.0900. Selling out-of-the-money puts with strike prices below current support could be another way to collect premium, as it benefits from either a stable or rising price and the expected decline in volatility after the event. Create your live VT Markets account and start trading now.

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