Fundamental Dynamics and Underperformance of the Dollar
Despite the US economy showing solid 2.1% annualized growth in the first quarter of 2026, EUR/USD has found a floor around the 1.08 level. This is surprising given the Eurozone’s own sluggish 0.5% growth and the wide interest rate gap. We see the dollar as underperforming relative to these fundamentals. We note that the interest rate differential between the Federal Reserve’s 4.75% and the ECB’s 3.00% is not providing the dollar with its historical level of support. This suggests the market may have already fully priced in the Fed’s hawkish stance. The dollar’s failure to break lower in EUR/USD points to underlying weakness.Strategy, Risks, and Historical Context
Given this, we believe traders should consider buying medium-term call options on EUR/USD, targeting the September 2026 expiration. This strategy positions for a potential move higher in the pair while defining risk to the premium paid. Volatility is currently near multi-year lows, making option premiums relatively inexpensive. The main risks to this outlook are a surprisingly strong US jobs report next month or hawkish commentary from the Federal Reserve. A prolonged escalation of tensions in the Middle East could also trigger a flight to safety, strengthening the dollar unexpectedly. Traders should use these events as key checkpoints for the strategy. Historically, we have seen similar periods where the market fades dollar strength right before a turn, such as in late 2022. The current environment feels comparable, with the dollar’s momentum stalling despite a favorable backdrop. We therefore see a greater probability of a move towards 1.10 than a break below 1.07 in the coming weeks.Start trading now — click here to create your real VT Markets account.
