The Euro (EUR) has experienced a slight dip, down 0.2% against the US Dollar (USD), reducing some of this week’s accumulated gains. Interest rate differentials continue to favour the Euro, supporting its recovery from early July losses.
The European Central Bank maintained its current policy settings, leading to a reassessment of expected rate cuts. The market is now expecting only about 15 basis points of easing by the end of the year, reducing earlier expectations by 10 basis points.
Euro Bullish Multi Month Trend
Germany’s IFO sentiment figures met expectations, while next week will see the preliminary CPI data release. The Euro is in a bullish multi-month trend, with higher lows and highs since February, and a bullish RSI above 50.
The Euro is anticipated to trade within a range of 1.1700 support and 1.1780 resistance in the near term. It is essential to conduct thorough research before making any investment decisions, as investing involves risks including potential total loss of principal.
Based on the supportive interest rate differentials, we see the recent dip as a potential opportunity. The European Central Bank’s policy stance has led us to factor in fewer rate cuts, with money markets now pricing in only a single 15 basis point cut by the end of 2024, a significant shift from earlier expectations. This fundamental backdrop supports holding a cautiously bullish view on the currency.
Strategy And Positioning
The upcoming preliminary CPI data for the Eurozone is the most critical event on our horizon. With the last headline inflation reading in September at 2.9% year-over-year, any figure that comes in higher would reinforce the central bank’s position and likely propel the Euro upwards. We should therefore consider positioning for a potential spike in volatility around that release.
Given the anticipated near-term range, we can use options to capitalize on this sideways movement. Selling out-of-the-money puts near the 1.1700 support level could be a viable strategy to collect premium, reflecting our belief that this floor will hold. This approach benefits from time decay as long as the currency remains stable.
For those aligned with the bullish multi-month trend, buying longer-dated call options is a way to participate in the upside beyond the immediate range. Historically, when rate expectations between the US and Europe diverge in the Euro’s favor, the EUR/USD has sustained uptrends for several quarters. This was evident in the rally that began in late 2022 after the policy pivot.
However, we must remain mindful of underlying economic weakness, as highlighted by the recent German IFO business climate index reading of 87.3 in February. A decisive break below the 1.1700 support level would invalidate the immediate bullish thesis. This level should be monitored as a key area to manage risk on any long derivative positions.
