The Euro (EUR) climbed to around 1.17 overnight but has since pulled back a bit. The US Dollar (USD) is struggling due to trade concerns, interest rate issues, and changing market sentiment. There is optimism about a possible end to the Ukraine war, with an upcoming meeting between Trump and Putin in Budapest. Currently, the interest rate differences between the Eurozone and the US for the 2-year sector have returned to -150 basis points, a level seen when the EUR was near 1.19. This suggests that the EUR/USD pair may find support during declines. Even though the Euro has dropped slightly from its peak, the weekly gain has formed a bullish ‘piercing line’ pattern, indicating a positive long-term outlook.

Risk of Euro Drifting Lower

The Euro may drift lower in the short term. However, it’s likely to find support in the low to mid 1.16 range. This information comes from the FXStreet Insights Team, which includes observations from market experts and analysts. The Euro is retreating from its recent highs near 1.15, but demand for the currency appears strong. The main factor is the changing outlook on interest rates. The US Federal Reserve has paused its rate hikes, while the European Central Bank is considering one more increase by year-end. This creates challenges for the USD, similar to trends we’ve seen before. This situation is reminiscent of mid-2018 when a narrowing 2-year yield spread helped boost the Euro. Currently, that spread has changed, with German 2-year yields at 3.25%, now higher than US yields at 3.10%. This shift stems from Eurozone inflation holding steady at 3.4%, while US inflation has decreased to 2.8%. In this context, any dips in the EUR/USD pair are likely viewed as buying opportunities.

Trading Strategies for the Euro

For traders, a potential strategy is to sell out-of-the-money EUR puts with short expirations to take advantage of the support. Look for support to form in the low to mid 1.13 range, creating a solid base. The premium earned from selling these puts allows for profit if the Euro remains stable or increases, suggesting limited downside from this point. While the long-term weekly chart shows a bullish pattern similar to past trends, short-term volatility still poses a risk. Implied volatility in the options market has increased to 8.5% following last week’s disappointing US retail sales report. Therefore, traders might opt for bull call spreads instead of buying calls outright to lower upfront costs and mitigate risk in case of a sharp, unexpected decline. Create your live VT Markets account and start trading now.

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