European currencies are gaining ground as funds shift away from US assets. A recent report suggests the European Central Bank might have asked banks to stress test their US dollar funding needs.

The potential restriction of access to emergency US dollar swap lines by the Federal Reserve is a concern. Although unlikely, this could lead to a faster diversification away from the dollar.

Potential Movement In Eur/Usd

A move to 1.150 in EUR/USD is considered premature without clear evidence of economic damage in the US from tariffs. Should the G7 summit not ease trade tensions and Treasury markets remain pressured, another rise in EUR/USD is possible.

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What’s suggested here is that traders are reacting to hints of stress in dollar funding markets. When central banks like the ECB quietly ask commercial banks to stress test their exposure, it tends not to be without reason. It can mean that policymakers are at least considering a scenario where access to dollar liquidity becomes tight — a scenario that usually coincides with market dislocations or rising global funding costs.

There’s also the matter of the US Federal Reserve potentially scaling back those emergency dollar swap lines. While not expected imminently, the fact that this possibility is now under discussion paints an environment where dollar dependency is suddenly less comfortable. From our perspective, the market is slowly digesting the idea that alternatives — mostly in Europe but partly also in Asia — could gain attention as a result. This doesn’t mean we upend everything, but trajectories begin to shift when old assumptions around liquidity and access are even slightly adjusted.

Geopolitical Influences And Expectations

Flows are already starting to reflect this: capital seems to be moving steadily back to European assets, which are now more attractive partly due to real rate differentials tightening and a more coordinated fiscal-monetary backdrop. That alone doesn’t necessarily justify a shoot to 1.150 in EUR/USD. But if this momentum continues and is accompanied by more persistent US Treasury weakness, the euro can keep pushing higher without needing a crisis to do so.

Now, considering where things stand, it’s very clear that much will turn on how upcoming geopolitical meetings — particularly the G7 — influence trade rhetoric. If officials walk away from talks without offering markets any clarity on tariffs or future regulatory steps, then we’ll likely see another leg higher in EUR/USD. Not because of better fundamentals in Europe, but more from the continued repricing of risk in the United States. If we see those headlines, especially alongside tighter dollar liquidity conditions, that would be the expected path.

We’ve also noticed that traders aren’t treating EUR/USD moves as temporary. There’s more engagement further along the curve — a shift into optionality that implies participants are positioning for more than just a short-lived bounce. This tells us the pricing isn’t only reactive; it’s increasingly positioning ahead of potential policy divergence or funding developments.

Timing matters. The current stretch provides scope to evaluate carry dynamics and how instrument volatility is behaving under relatively low realised moves. For instance, positioning in options markets appears to favour calls, with premiums rising more quickly than their put counterparts, a feature which might continue unless the Treasury yield picture changes abruptly.

In the near term, the smarter approach involves adjusting short-dated exposures and watching how central banks handle liquidity narratives at upcoming meetings and in their minutes. If they’re forced to talk more about stability tools or collateral availability, that will be informative beyond just FX. We’re carefully watching funding terms inside all three major jurisdictions — Europe, the US, and Japan — for hints of stress or implicit accommodation.

Of course, everything hinges on how trade calculus unfolds, particularly surrounding US policy on tariffs and supply chain constraints. If that worsens, US real yields could remain under pressure, and duration pain in the bond market could spill over further. This is where a gentle diversification becomes something less optional and more necessary for institutional exposure management.

At a more technical level, implied volatilities are still offering efficient entry for directional bets, especially in gamma terms. But we recommend closely watching skews for signs of overcrowding — those have started flattening out somewhat, possibly suggesting new risk regimes forming. Skew steepening, particularly in longer-dated tenors, would merit adjusting exposure quickly.

As the week develops, whether this trend continues will depend on follow-through flows. European data — though soft — isn’t deteriorating fast enough to derail the current price action. Therefore, traders should remain attentive to Treasury auctions, ECB communications, and any sudden pricing changes in cross-currency basis markets. Moves there often precede changes in broader macro sentiment, and in the past, they’ve helped us navigate turns in currencies and volatilities earlier than the broader market.

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