ECB officials have recently suggested that concentrating on euro strength is unhelpful. This follows market concern two weeks ago when EUR/USD moved above 1.20.
Officials have noted that most of the euro’s rise happened in the first quarter of 2025. This period followed the announcement of a German fiscal package and an initial depreciation of the US dollar.
The ECB is expected to hold back from a stronger reaction unless the euro’s appreciation becomes more pronounced. The focus is on whether the ECB would use firmer language or cut interest rates if EUR/USD rises further.
The euro continues to be widely discussed in public comments by officials. Questions centre on what EUR/USD level might prompt the ECB to respond.
A strong euro can reduce the competitiveness of euro area exports. EUR/USD moved above 1.19 again yesterday.
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Given the European Central Bank’s clear discomfort with EUR/USD above 1.20, we see a soft cap forming on the pair’s appreciation. Their reluctance to act decisively, however, suggests they will tolerate strength below this key psychological level for now. This creates an environment where upside is likely limited in the near term.
This view is supported by the latest economic data from last week, showing Eurozone inflation remaining sticky at 2.4% while quarterly GDP growth was a sluggish 0.2%. The ECB is trapped, as it cannot justify cutting rates to weaken the euro while inflation is still above its target. Therefore, we expect verbal warnings to increase if the pair makes a sustained move towards 1.21, but no policy action is imminent.
For derivative traders, this points towards selling volatility, particularly on upside strikes. Selling call options with strikes at 1.2100 or higher for late February or March expiries looks attractive, as the ECB’s verbal intervention is likely to cap rallies there. A more defined strategy would be implementing a bear call spread to profit from this expected range.
Looking back, speculative positioning in the futures market is now showing net long euro positions at levels not seen since the second quarter of 2025, just before a sharp correction. This suggests the long euro trade is becoming crowded, increasing the risk of a swift downturn if sentiment shifts. Buying some cheap, out-of-the-money puts could serve as a prudent hedge against such a reversal.
On the other side of the pair, recent US inflation data has surprised to the upside, casting doubt on the Federal Reserve’s next move. This uncertainty is providing some underlying support for the dollar, further reinforcing the idea that the path for EUR/USD to break significantly higher is limited. This dynamic strengthens the case for range-bound strategies over the next few weeks.
