EUR/USD continues to be robust, maintaining nearly a 1% gain in two days, nearing 1.1743 highs. This strength follows an improved ZEW Economic Sentiment Survey in the Eurozone and Germany, exceeding forecasts.
US President Trump’s announcement of new tariffs on European countries spurred a “Sell America” trade, weakening the US Dollar. As markets remain cautious, Eurozone leaders convene in Brussels discussing potential responses.
Improved Economic Sentiment
In Germany, sentiment about their economy improved to a four-year high of 59.6 in January from 45.8 last month. The Eurozone’s sentiment also enhanced to 40.8 from 33.7, surpassing expectations.
The Euro strengthened, gaining nearly 1% against the US Dollar over two days, amid concerns over US policy. Meanwhile, the German Producer Prices Index showed a 0.2% contraction in December beyond expectations.
The final Eurozone Harmonised Index of Consumer Prices was adjusted to 1.9% year-on-year for December, while core HICP was confirmed at 2.3%. EUR/USD is trading near 1.1720, with technical indicators suggesting further strength but potential resistance near 1.1740.
Data releases, particularly inflation and economic indicators, affect the Euro’s value significantly. A robust economy or higher-than-expected inflation encourages higher interest rates, attracting foreign capital, which strengthens the Euro. The trade balance also plays a role, as a positive balance often boosts a currency’s value.
The Euro’s Solid Prospects
The “Sell America” trade is clearly in motion, and we should lean into this momentum for now. The strong rally in EUR/USD is driven by political risk against the dollar and surprisingly good economic sentiment from Germany. Buying short-term call options on EUR/USD seems to be the most straightforward play to ride this wave.
This current dollar weakness amplifies a de-dollarization trend we have seen building since 2024. We saw central banks consistently add over 1,000 tonnes of gold to reserves annually through 2024 and 2025, actively diversifying away from US assets. The new tariff threats are just accelerating a process that was already well underway.
On the other side of the pair, the Euro looks solid, with the German ZEW sentiment reading being the highest since the recovery period of 2021. With Eurozone core inflation having stabilized around the 2% target, a major difference from the volatility we navigated back in 2023, the ECB is unlikely to stand in the way of this rally. This gives the Euro a clear runway to appreciate against a weakening dollar.
However, as the pair approaches the 1.1740-1.1765 resistance zone, which acted as a major ceiling for months back in 2025, the rally might be getting overstretched. A bull call spread could be a prudent way to stay in the trade, as it lowers the initial cost and defines risk. This strategy keeps us positioned for a move towards 1.1800 while protecting against a sudden pullback.
The President’s upcoming speech at Davos is the main risk event that could turn this market on a dime. Therefore, it is wise to protect long positions by purchasing some cheap, short-dated put options with a strike price around 1.1650. This acts as a small insurance policy in case the political narrative shifts and the dollar sell-off rapidly reverses.
