The Euro has risen by 0.7% against the US Dollar, reversing its previous decline from December highs. This increase is supported by a high correlation with its three-month risk reversal, which stands at 0.96 based on a 21-session rolling average.
A robust ZEW sentiment survey for Germany and the euro area bolsters this rise. This survey is considered an indicator of industrial activity, giving the European Central Bank (ECB) some reassurance. Comments from the ECB’s Villeroy are neutral, emphasising inflation risks. Boris Vujcic, from Croatia’s central bank, is set to join the ECB’s Executive Board.
Euro Surpasses Key Moving Averages
The Euro surpassed the 50-day moving average of 1.1666 and found support at the 200-day moving average of 1.1592. The Relative Strength Index indicates a return to a bullish trend. If the late December high of just above 1.18 is breached, attention will shift to the mid-September high of 1.1919. Near-term expectations suggest the Euro will range between 1.17 and 1.18.
Looking back to this time in 2025, we saw a powerful bullish signal for the Euro as it broke through key technical levels. The move was driven by a surge in sentiment, confirmed by a German ZEW survey that jumped significantly, reassuring European Central Bank officials. This sentiment shift pushed the EUR/USD exchange rate above its 50-day moving average.
That particular rally last year was a classic setup, as the correlation between the Euro and market sentiment, measured by risk reversals, was exceptionally high. The positive economic data provided a fundamental reason to buy, and the subsequent price action saw the pair rally towards the 1.1900 level over the following month. This historical context shows how quickly a shift in leading indicators can translate into a sustained market move.
Current Market Conditions
Today, the situation is different as we face persistent inflation concerns and a more cautious ECB tone. Recent Eurozone inflation data released last week showed a headline rate of 2.1%, still above the ECB’s target, which complicates any dovish pivot. Unlike the clear optimism of early 2025, the market is now pricing in a period of slower growth, with the latest German industrial production figures showing a 0.5% contraction last month.
Given this backdrop, traders should consider hedging against potential Euro weakness. With the EUR/USD currently trading near 1.0850, buying put options with a strike price around 1.0700 could offer protection against a downturn in the coming weeks. This strategy allows for participation in downside moves while limiting the initial cost.
The current low implied volatility, with the Euro Currency Volatility Index (EVZ) hovering near multi-year lows around 5.8, makes purchasing options relatively inexpensive. This environment is favorable for establishing bearish positions or hedges without overpaying for time premium. We should watch for a break below the 200-day moving average, now at 1.0800, as a key signal for further declines.
