EUR/USD rose on Wednesday as US Dollar strength faded, with the pair trading near 1.1805 after a daily low of about 1.1771. The move followed renewed trade tension linked to US tariff action.
President Donald Trump announced a 10% global tariff after the US Supreme Court ruled last week against his use of the International Emergency Economic Powers Act (IEEPA). The tariff took effect on Tuesday under Section 122 of the Trade Act of 1974, and the White House said a formal order is being prepared to raise the rate to 15%.
Trade Tensions And Policy Signals
The European Parliament paused ratification of the US-EU trade deal agreed last year. Separately, the US Dollar found some support as markets reduced expectations for near-term Federal Reserve rate cuts, with inflation referenced against the 2% target.
In the Eurozone, final estimates showed HICP inflation at 1.7% year on year in January, down from 2.0% in December and the lowest in 16 months. Core inflation eased to 2.2% from 2.3%, and markets price unchanged ECB rates through 2026.
Eurozone Consumer Confidence and the Economic Sentiment Indicator are due on Thursday. US PPI data is due on Friday.
The rebound in EUR/USD toward 1.1800 presents a complex picture driven by conflicting signals for the coming weeks. While the Federal Reserve remains cautious on rate cuts, fresh trade tensions from last week’s tariff announcement are weighing on the US dollar. This creates an environment where sudden moves are more likely.
Options Market Signals
We are seeing this uncertainty reflected directly in the options market. The Cboe EUR/USD Volatility Index has climbed to 7.8% this week, a notable increase from the lows seen earlier this month. This suggests traders are pricing in a wider range of potential outcomes for the currency pair in the near term.
The fundamental story of policy divergence is still a key factor holding the euro back from a more significant rally. The yield spread between German and US 2-year government bonds has widened further, supporting the dollar’s underlying strength. This makes any euro upside feel fragile and dependent on political headlines rather than economic data.
Given the heightened political risk from the tariffs announced last week, buying volatility could be a prudent strategy. Purchasing an at-the-money straddle on EUR/USD would allow a position to profit from a significant price swing in either direction. This approach hedges against being on the wrong side of the next major trade announcement from the White House.
For those who believe the recent low near 1.1771 will hold, selling out-of-the-money puts could be an option. This strategy generates income from the elevated volatility while defining a clear risk level. However, we must be cautious as a surprise escalation in trade disputes could easily push the pair through this support.
