Technical Setup and Market Sentiment
Given the EUR/USD is weakening around 1.1425, our immediate view is one of caution. The bearish trend is clear, but with the Relative Strength Index (RSI) entering oversold territory, the risk of a sudden upward correction is growing. We advise against initiating aggressive new short positions at these levels, as the downward momentum could be nearing exhaustion. The fundamental picture supports a weaker Euro, creating a divergence that fuels the dollar’s strength. Recent data shows Eurozone inflation has moderated to 1.9%, giving the European Central Bank room to maintain a dovish stance, while US core inflation remains stubbornly higher at 2.8%. This policy divergence, a theme we have seen develop since the rate cuts of 2024, continues to favor holding US dollars over Euros.Strategy and Risk Considerations
With geopolitical uncertainty rising from the cancelled US-Iran talks, we have seen one-month implied volatility in EUR/USD options tick up to 8.5%, a three-month high. This makes selling premium an attractive strategy, so we favor using bear call spreads with a short strike above the 1.1577 resistance level. This approach allows us to profit if the pair moves lower, sideways, or even slightly higher, while strictly defining our maximum risk. Historically, an oversold RSI is not an automatic buy signal, especially in a strong downtrend. We saw similar conditions in late 2024 where the price consolidated for weeks before staging any meaningful recovery. Therefore, traders should wait for a confirmed break back above the 1.1450 resistance before even considering short-term long positions. For those wanting to position for a continued slide towards the 1.1308 support level, using put spreads is a prudent choice. This limits the capital at risk, which is wise when an asset is oversold and prone to sharp bounces. This strategy offers a defined-risk way to stay with the prevailing bearish trend.Start trading now — click here to create your real VT Markets account.
