EUR/USD has spent most of the past year boxed between 1.14 and 1.20, averaging about 1.17, and the low-volatility backdrop has tended to amplify even modest breaks. In January the pair moved from below 1.16 to above 1.20, before slipping back to 1.18 within two weeks; later, it traded from above 1.18 in mid-April to below 1.14 by mid-June. With volatility suppressed, forecasts have been compressed while position sizes have risen, a mix that can turn a range break into a painful move that may ultimately cap follow-through.
Technical signals have swung sharply. RSI flagged the euro as overvalued, then undervalued, and then overvalued again within weeks in January, while in March it flashed “oversold” as EUR/USD approached 1.14 and that level held. Against that backdrop, the latest read is that the Dollar rally looks stretched relative to recent price action. Consensus Economics ranked a 1.12 EUR/USD call for this time next year as the lowest in its June report, published when the pair was just above 1.15, while Fed and ECB expectations have since been reset and the next move is framed as data-dependent.
Recent Trading Range and Volatility
We see EUR/USD has spent most of the last quarter in a tight range between 1.08 and 1.10. Implied volatility has fallen significantly, with the Deutsche Bank Currency Volatility Index recently hitting a low of 6.5. This low-vol environment means even small moves out of this range could feel much larger and trigger a cascade.
The recent rally from 1.06 felt sharp, but the RSI is now telling us that the move is stretched relative to its recent past. We saw similar signals back in March when the pair touched 1.10, before quickly reversing. This is why even those of us who prefer fundamentals are watching technical levels like the RSI more closely than usual.
Central Bank Policy And Trading Strategies
Both Fed and ECB expectations seem to have been reset by the market, creating this pause. With recent US core services inflation remaining sticky above 4.8% and Eurozone CPI ticking up to 2.6%, both central banks are in a wait-and-see mode. We will need fresh jobs and inflation data to drive the next significant leg of this move.
Given this backdrop, selling volatility seems like the most logical play for the coming weeks. We believe strategies like short strangles or iron condors on EUR/USD, centered around the 1.07 to 1.11 range, could be effective for collecting premium. However, the low volatility has likely encouraged larger position sizes, so any break from the range could cause enough pain to limit how far it goes.
