The Euro remains steady, trading in the mid 1.17s against the US Dollar, with slight gains observed as the week progresses. It stays just below last Thursday’s high, supported by factors including yield spreads between the euro area and US markets. The spreads have reached new highs, approaching levels from mid-2023.
Euro Area Industrial Production
Euro area industrial production figures for October were consistent with expectations and caused little movement in the market. The focus this week is on the European Central Bank’s policy decision, expected to hold the depo rate at 2.00%. A forecast update had already been communicated, boosting the Euro to recent highs.
The EUR is strong, with no notable decline from last Thursday’s peak. The Relative Strength Index (RSI) indicates bullish levels, suggesting overbought conditions. No substantial resistance is expected before 1.18 and the mid-September high in the lower 1.19s. Predictions suggest that the Euro will remain within a range of 1.17 to 1.18 in the near term.
With the Euro holding steady in the mid-1.17s, we see the market pausing ahead of the key European Central Bank meeting this Thursday. The pair is showing strength, staying close to the highs we saw last week. This stability suggests underlying support for a potential move higher.
The main event for traders this week is the ECB’s policy decision, where a rate hold at 2.00% is almost certain. November’s final Eurozone CPI print of 2.3% YoY, slightly above the 2.2% forecast, reinforces the view that the ECB has little room to be dovish. This contrasts with last week’s US jobless claims data, which saw a surprise jump to 245,000, hinting at a potential cooling in the American labor market.
Widening Yield Spread
This economic divergence is widening the yield spread between the euro area and the US, making the Euro more attractive. These spreads are now challenging the highs we saw back in 2024. We’ve seen this pattern before, such as in the second quarter of 2023 when similar spread dynamics preceded a significant rally in the Euro.
Given this backdrop, we think buying short-dated call options with a strike price near 1.18 is a sensible way to position for a post-ECB breakout. A more conservative strategy involves setting up bull call spreads to capitalize on a move towards the 1.19 level while managing costs. This approach allows traders to profit from the expected upward drift.
However, we must be cautious as the Relative Strength Index is near 70, signaling potentially overbought conditions. A surprisingly dovish tone from the ECB on Thursday could trigger a sharp pullback. Therefore, using put options with a strike below 1.17 could serve as a valuable hedge against any unexpected reversal.
